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Simply pledging to reach net zero emissions by 2050 is no longer enough, and 2030 has become the new target for much of the necessary economic overhaul. The participation of governments, companies, investors, and consumers is vital, as the effects of global warming manifest today through wildfires, flooding, drought, and the loss of habitat that gives rise to new diseases.
Chart 1. Sustainable investing is developing fast, with huge growth in environmental fund flows
Source: Morningstar, Goldman Sachs Global Investment Research, April 2021. *Only through April 2021.
Tackling emissions as a company and an asset manager
At Fidelity International, we are taking action on behalf of our clients and society. We have brought forward our company net zero pledge from 2040 to 2030 (see our Corporate Sustainability Report for details). We have called on governments to use policy signals to speed up the transition, and have committed to net zero alliances, including those supporting the UN climate conference (COP26) later this year. But the biggest contribution we can make is through urging our investee companies to decarbonise more quickly.
In the last year, we have done just that with some of the world’s heaviest emitters through the collaborative Climate Action 100+ initiative. We have persuaded more banks to end coal financing, highlighted the social costs of climate change, and challenged companies to preserve biodiversity.
We prefer engagement over exclusion as it often leads more effectively to real-world decarbonisation as opposed to just reducing an investment portfolio’s carbon footprint. But where companies refuse to change, we do divest; and we continue to review fossil fuel sectors to see where divestment can be effective. The International Energy Agency says ending all new oil and gas exploration by the end of 2021 is essential to achieving net zero, which could further quicken the move to cleaner forms of energy.
As environmental, social and governance (ESG) regulation gathers pace, we support efforts to improve disclosure and set a global reporting standard. We have adopted the European SFDR rules within our fund range. In 2020, we published our first Taskforce for Climate-Related Financial Disclosures report (TCFD), and we encourage companies around the world to do likewise.
Using our climate alignment assessment and ESG ratings
With climate a global priority and a need for green financing, we believe there is greater scope to work urgently with companies to cut emissions. In 2020, we were a founding signatory of the Net Zero Asset Managers Initiative which supports investments that get us to net zero by 2050. Now we are exploring an interim target to halve the carbon footprint of the portfolios we manage by 2030.
To help achieve net zero, we are introducing a climate alignment assessment for each company that shows how far their business aligns or plans to align with a 1.5°C warming pathway. This sits alongside our ‘Environmental’ rating that grades 4000+ companies on characteristics such as emissions reduction, water usage, biodiversity, and climate risk, within our proprietary ESG ratings framework.
Our unique approach allows us to leverage the expertise of our research analysts. They conduct the ESG ratings assessments of companies and ensure that sustainability considerations are authentically integrated into their investment analysis.
These forward-looking ratings then form the backbone of how we fully embed ESG factors into our fund range. We continuously look for ways to enhance them using more comprehensive data sets (e.g. climate analytics) and real-world observations from our analysts. Separately, our macro team is modelling how climate risks affect long-term capital market forecasts for different economies, and monitoring carbon price developments.
We continue to expand our range of climate-focussed and sustainable strategies to give clients greater access (across asset class and vehicle type) to low-carbon opportunities and to help them mitigate climate risks. Within our real estate franchise, impact investing could soon be the only kind, given the sector’s high emission levels.
Finally, we have changed our voting policy to set minimum climate standards for investee companies, including board oversight of climate risks and emissions reduction targets. We will vote against the directors of companies that do not meet these standards. These are just the steps we are taking today. There will be many more in the years to come as we seek to play our part in averting this global threat.
Employee welfare and online inclusion during the pandemic
Other issues came to the fore in 2020, most notably how companies responded to Covid-19. Governments sought our advice on how to assist companies financially, and we discussed with companies how they were supporting employees and dealing with supply chain disruptions. This included situations where human rights, for example those of seafarers, were infringed or where incidents of modern slavery were uncovered. Later in the year, we called on companies to limit executive pay if they had received emergency government support.
Workforce inequality rose as a result of the pandemic. We regularly engaged with companies on narrowing the social divide and improving diversity, and set more ambitious targets for ourselves. We plan to vote against the election of board directors where female representation does not meet our requirements.
Lives moved further online due to Covid-19 and concerns about digital safety increased, while for the other half of the world that doesn’t have internet access, concerns focussed on inclusion. So we broadened our engagements on cyber security to include online welfare, accuracy of information and ethical AI design. Government intervention in the technology sector will only grow as it becomes ever more integral to our way of life, including in areas of national security and the transition to a low-carbon economy.
2020 was a year of global existential threat, and we have all had to adapt. But from it has emerged a near-universal desire for a more sustainable world. This is pushing all of us to do more, together, and more quickly, this year and beyond. It’s time to step up.