Sustainable investing has never been so high up on the public agenda and in demand from investors. It is one of the biggest disruptive trends of the industry, demonstrated by global events such as the global health pandemic, the energy crisis, and the serious effect of climate risks on the environment and societies. Increasing regulation is also coming into effect across markets, which will give investors greater clarity and reassurance in relation to ESG solutions. Against this backdrop, Fidelity International (“Fidelity”) sees sustainable investing becoming mainstream across the globe.

Today, the world is entering a new phase of sustainable investing which reflects both the better availability of data and a more mature approach to ESG integration: one that acknowledges the necessary trade-offs between the short-term decisions required to remain in business versus the longer-term needs of customers, employees, and communities. This is where ‘Double materiality’ comes in, which takes a more holistic view on ESG risks and opportunities.

“The principle of Double Materiality takes both an outside in and inside out approach to ESG assessments. It recognises that companies are not only responsible for managing the financial risk of the social and environmental factors upon which they depend but are also responsible for the actual impact that their business has on people and the planet,” said Ellie Tang, Director, Sustainable Investing.

In this context, Fidelity anticipates firms will ‘get real’ on ESG in 2023 with a focus on the just transition, natural capital, and active stewardship.

Three Key ESG themes to look out for in 2023

1) Just Transition

As nations around the world aim to collectively decarbonise key sectors of the economy, Fidelity believes it will be important to consider the social implications of such a transition and the impact on labour markets and workforces. Collective efforts to decarbonise should actively take into account certain groups of individuals or communities whose livelihoods are dependent on fossil fuels or carbon intensive industries, either economically or socially.

Ellie Tang, comments: “When engaging with companies on climate change, it is important to explicitly integrate the principle of a “Just Transition”, ensuring companies are considering the broader implications of their decarbonisation approach. The race to net zero can’t afford to leave anyone behind, and it is important to address the social and economic challenges for workers and communities impacted by the transition.”

2) Natural Capital

The loss of biodiversity is unprecedented and is accelerating. Over the past 50 years, global wildlife populations have reduced by 68%1, posing a serious threat to global economic prosperity and supply chains. It is also exacerbated by its direct connections with climate change: climate change is one of the main drivers of biodiversity loss, but destruction of ecosystems undermines nature's ability to regulate greenhouse gas emissions and protect against extreme weather, thereby accelerating climate change. Regulatory frameworks such as the EU taxonomy and Taskforce on Nature-related Financial Disclosures (TNFD) are helping to address some of these issues.

Paul Milon, Director, Sustainable Investing, comments: “Climate change and biodiversity go hand in hand: we need to preserve natural capital to achieve net zero, and to tackle climate change to reduce pressures on biodiversity. Over half the world’s GDP is moderately or highly dependent on nature and its services, which stresses both the financial risks from nature loss and opportunities in preserving and restoring natural ecosystems. To this end, Fidelity is a signatory to the Finance for Biodiversity Pledge (FfB) and a member of the Natural Capital Investment Alliance (NCIA).”

3) Active Stewardship

As companies further develop their business, the range of non-financial factors that influence financial value continues to increase and constitute key success factors. Active asset managers have a role to play to help investee companies anticipate, prepare, and adapt to disruptions and changing market conditions with a view to delivering resilient and sustainable growth over the long term.

Paul Milon, comments: “Our corporate access, research capabilities and scale put us in a credible position to engage with companies on sustainability issues. These engagements inform our proprietary ESG ratings, which now cover over 4,000 companies. Fidelity continues to evolve our approach to active ownership in 2023 through a range of connected, influencing strategies that seek to achieve better long-term financial, environmental and social outcomes for our clients.”

Regulation remains in the spotlight

In many markets, new waves of regulation targeting sustainability are already coming into force or on the horizon. Indeed, Sustainable Finance Disclosure Regulation (‘SFDR’) level 2 Regulatory Technical Standards (‘RTS’) that frame asset management companies’ communication regarding Article 8 and Article 9 funds have gone into effect from 1 January 2023. In parallel, the Corporate Sustainability Reporting Directive (‘CSRD’), which seeks to strengthen corporate financial and ESG reporting obligations, has also come into force this year.

Gabriel Wilson-Otto, Head of Sustainable Investing Strategy, comments: “Regulation can drive greater transparency through common frameworks, underlying data standards and better data availability. But simply having the information is not enough. What matters is how investors use and interpret this data to drive meaningful analysis of, and engagement with, companies to generate real-world outcomes.”

Getting Real about ESG

Fidelity is committed to sustainable investing and has a well-defined ambition to achieve net zero at a corporate level by 2030, and for its investments by 20502. At the heart of Fidelity’s approach to sustainable investing is ESG integration underpinned by fundamental research and insights and an active ownership programme through which Fidelity seeks to drive sustainable investment outcomes in partnership with the companies in which it invests.

Over the years Fidelity has launched a number of dedicated policies and roadmaps such as the climate investing policy3, the deforestation framework4 and refreshed voting principles and guidelines5. It is also a signatory of key climate and biodiversity initiatives and plays an active role in supporting industry regulatory working groups.

Gabriel Wilson-Otto, comments: “2023 will be a crucial year for sustainable investing, and it will also be a pivotal one for Fidelity as well. We are enhancing our range of Sustainable Funds, prioritising active stewardship, natural capital and a just transition as we believe they will not just deliver long-term value creation to our clients but also accelerate the transition towards a low carbon and more inclusive economy.”