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.