Fidelity's proprietary sustainability ratings

Fidelity's proprietary sustainability ratings

Fidelity continues to refine how we integrate ESG considerations through our investment process, our program for corporate and regulatory engagement and collaboration.  In 2019 we introduced our own proprietary sustainability ratings which means we assess not just what the company is today, but what we think the company will be in the future.

It is important to understand why we believed we needed to create our own sustainability ratings system. Until two years ago, we were using a ‘quantamental’ type of rating to assess companies on ESG, which had its limitations.  We used inputs from third party providers, their ratings, their data, and created our own materiality mapping on what we deemed important, and using this data we determined an ESG score.  While useful, this model had its limitations.  It sat outside our global research platform and relied heavily on external data - which is essentially a view on a company’s point in time ESG rating.  

To truly embed ESG into our investment process we decided to introduce an ESG ratings system - use our own analyst research and create a ratings system which is robust and forward looking.  This means our sustainable ratings don’t rely solely on public information, and essentially becomes part of our DNA - our deep fundamental research and analysis on every company that we own.   

Analysts rate companies on ESG factors relevant to their industry and for companies that have securities both in equities and fixed income, our analysts will work together in order to come up with a joint view - designed to be forward looking.  In other words, they are an assessment of not just what the company is today, but what we think the company will be in the future.

This is driven by our belief that a lot of the alpha signal in ESG investing is from the improvement that companies make in their sustainability practises. It isn't just about investing in the good companies. It's about also investing in companies that are going to be good tomorrow. We aim to promote change through our engagement programme and enjoy the financial returns as a result that will accrue to those companies as a result of that. 

In summary, Fidelity’s approach to sustainable investing focuses on three main pillars:

  1. Integration of ESG considerations through our investment process. Increasingly, we believe successful investing is going to be about choosing the companies that have the superior sustainability characteristics because these are the companies that are going to be the winners of the future, and our investment process needs to evolve to be able to identify those companies.
  2. Corporate and regulatory engagement. We work with the companies that we're invested with; we try to promote the kinds of standards that we think are necessary in order for these companies to succeed both from a societal perspective and also from a shareholder perspective.
  3. Collaboration. We want to be part of the right platforms and we want to do this in partnership with our peers and with our clients in the industry, where we feel that we can leverage our effort for the maximum impact.

Inside how Fidelity engages for change

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