Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
ESG ratings are one of the best tools available to investors who want to understand their companies’ sustainability levels. In the rapidly evolving world of Environmental, Social and Governance (ESG) investing, they’re an easy way for you to assess the environmental and societal impact of the companies you invest in.
To help make sense of ESG ratings - what they are, why we use them, and how they can help you - I caught up with one of our sustainable investing analysts, Flora Wang.
Hi Flora. Perhaps you could start by telling me - what exactly are ESG ratings?
Hi Toby. An ESG rating is an evaluation of how well a company proactively measures its environmental, social and governance issues. They’re designed to help private investors make sense of the ESG risks attached to their companies. Here at Fidelity, our research analysts have developed our own ratings system which we integrate into our standard company research. That means ESG analysis is embedded into our entire investment approach.
What do Fidelity’s ratings look like?
Our analysts assign a rating of A (best) to E (worst) for each company we assess. An A rating represents a company which has clearly understood and is proactively managing the ESG issues which can affect the long-term shareholder value of the company. An E rating represents the converse.
How does your ratings system differ from those of other agencies (such as MSCI)?
Fidelity’s ESG ratings are based on our bottom up company research and our regular interactions with management teams and boards within our universe of 4,000 issuers. We seek to measure a company’s current sustainability practices, not just their previous sustainability disclosure, and we anticipate how this might change over time. Our ratings are therefore fundamentally forward looking in nature.
We believe a meaningful ESG assessment requires a deep understanding of the company’s business operations and management track record, which can only be offered by an experienced investment team. That’s key for us. We don’t create our ratings in isolation. Our investment analysts consider sustainability alongside everything else we look at when assessing a company.
Could you take us through your process for assigning a rating?
The ratings are assigned by Fidelity’s team of 180 investment analysts across the world. Our analysts work in collaboration with each other across asset classes, conducting more than 16,000 company meetings every year, and they update the ratings at least annually or on the occurrence of a significant ESG event.
We’re looking for four things in particular: awareness, action, results and direction of change. That means we’re concerned with a company’s future ambitions just as much as its past action. It’s important for us to know whether a company is heading in a “stable”, “improving” or “deteriorating” direction. We’re looking forward rather than backward - we believe that’s where value lies for investors, and it sets our ratings apart from other third-party agencies like MSCI and Sustainalytics.
Are there any other ways you’d suggest investors assess their companies’ sustainability levels?
Ultimately, there is no substitute for an investor carrying out their own due diligence and forming their own views of a company’s sustainability characteristics. It is important in this process to dig beneath the surface and not simply accept the company’s written public disclosure as evidence of their sustainability but also to consider how genuine are their stated beliefs and practices around environmental and societal issues. It may also be helpful to compare the companies against their peers in related sectors and geographies, as best practice in this space is moving fast. Our ratings are designed to be a guide in helping our investors to form their own views.
More on Sustainable and ESG investing
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.