Tracking the transition - building a more sustainable economy

Tracking the transition - building a more sustainable economy

Fidelity International’s second annual ESG Analyst Survey finds signs of year-on-year progress towards achieving net zero, but there is a long way to go in the progress towards building a more sustainable economy.

Key takeaways

  • Europe still leads on net zero, but China is making strides
  • More companies are now linking executive remuneration to ESG issues
  • Deforestation policies are becoming more common

This year’s survey finds tangible signs of corporate progress towards net zero, despite the impact of the war in Ukraine, and an increase in the immediate demand for alternatives to fossil fuels (including coal) to alleviate higher prices. We asked our analysts about this transition, and they reported positive developments on some of Fidelity’s key sustainability themes for 2022 such as deforestation. An increasing number of analysts also reported a strengthening in the link between executive remuneration and ESG issues over the last 12 months. 

Net zero: Europe still leads but Chinese firms are starting to change

Among regions, Europe is still out in front on the transition to net zero, with analysts covering companies in the region reporting the highest proportion of companies that are “leading the charge”.
 
Meanwhile, China currently has the smallest proportion of companies that are “leading the charge”. However, according to our analysts, more than half of the Chinese companies covered by the survey are starting to change. This is reflected in the proportion of analysts who reported that Chinese companies are expected to meet net zero by 2050, which has more than doubled from last year to 65 per cent. This is a remarkable development, reflecting strong steers from the Chinese government.
 
One analyst covering Chinese industrials says: “Given the priority that China puts on net zero and increasing investor awareness, most Chinese aviation and logistics companies have started initiatives on the energy transition”. 

Several other China-focused analysts echo this sentiment that Chinese companies are responding to top-down cues following Beijing’s 2020 announcement that it is targeting net zero by 2060. However, the survey also contains some less positive responses, as other analysts have noted that some of the country’s businesses are “still early in their ESG journey”.

Consistent with last year, analysts in aggregate see more potential opportunities than risks from the green transition for companies, especially over the long term. Japan stands out, with significant opportunities expected to emerge in autos, consumer staples and semiconductors over the next decade. China is also likely to benefit from green opportunities and is already a market leader in areas such as solar panels.
 
“Semiconductor tech improvement is itself a source of energy efficiency,” says one Japan analyst covering the IT sector, “while digitalisation is a source of semiconductor demand.”

More companies adopting policies on key ESG issues 

Looking more closely at companies’ actions, our analysts noted several areas of progress. For example, the number of analysts reporting that the companies they cover now link executive remuneration to greenhouse gas (GHG) emissions has increased.
 
43 per cent of the analysts say the companies they cover now link GHG emissions to executive remuneration (up from 34 per cent last year), while 39 per cent say their companies link executive remuneration to employee welfare (up from 32 per cent). Both responses are now more common than ”do not link”, although this remains the most popular answer among China and Japan-focused analysts. 

Progress on Fidelity’s core sustainability themes

Our analysts are also reporting an increase in the proportion of companies with formal policies on other environmental issues such as deforestation, which is a key sustainability theme for Fidelity in 2022, following a pledge we made alongside other investors at the time of COP26.
 
Unfortunately, there are still many companies without such policies. Moreover, having a policy and having a good policy are two different things, and approaches vary across sectors. One analyst covering European healthcare finds their companies’ biodiversity policies are “mostly just lip service, high-level and feel quite boilerplate, with very few concrete examples”, while one Europe-focused energy analyst says for his sector “emissions are the priority”. 

Another core theme is the just transition. One part of this idea is that the move to a greener economy risks economically harming some individuals and communities, such as those working in the fossil fuel industry, and that efforts should be made to mitigate these risks.  Here too there are signs of incremental progress, with a greater proportion of businesses having announced initiatives to promote a just transition by supporting displaced employees.

Energy stands out as a stark exception. Not only does the survey reveal that there are few initiatives underway to retrain workers but in another survey question we asked, 90 per cent of our energy analysts reported that the sector is highly vulnerable to future job losses. This suggests that workers may shift sectors entirely - or end up unemployed - rather than be retrained for new roles.

Progress is slow - but it is happening

Transitioning to a sustainable economy is fraught with challenges. Progress is slower than we would like but it is happening. Identifying those companies taking concrete actions - such as tackling their deforestation impact or mitigating the social impact of shifting to new technologies - is crucial to supporting the transition and allocating capital to where it can do the most good.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended as general information for use by advisers and wholesale investors only. Retail investors should not rely on any information in this document without first seeking independent advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change.  While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused, and Fidelity Australia hereby disclaims liability for any and all kinds of loss or damages arising from, or in connection with, the use of any information contained in this document. Fidelity Australia accepts no responsibility for the accuracy of any information included in this document which have been provided by / sourced from third parties. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009.. 

© 2022 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. The Target Market Determination (TMD) for Fidelity Australian product(s) can be found at www.Fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

© 2022 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

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