The Fidelity Sustainable Global Equity Income Fund focuses on investing in high quality dividend payers and owning those companies over a long-term horizon. As a dividend-based total return strategy, two key components of the total return we deliver are the dividends of the portfolio companies and their dividend growth. Integrating sustainability into our analysis helps us to focus on companies with resilient business models and therefore sustainable and growing dividend streams.
Many factors drive the long-term resilience of a business and therefore the resilience of its earnings and dividends. Industry structure, disruptive threats and pricing power are just a few of the factors our team analyse to build a forward-looking view of the prospects of a company. Another key aspect is to analyse a company’s stewardship of their business. Are strategic, operational and capital allocation decisions aligned with long-term value creation? Crucially, to answer this question we must consider the company’s management of its environmental and societal impact and whether company management are truly considering the long-term horizon.
Focusing on material risks
When carrying out this analysis, we must acknowledge that different businesses face different environmental and social challenges. For example, for our holdings in the water intensive semiconductor industry such as TSMC, water reduction policies should be in the spotlight. For our consumer staples holdings such as Unilever, the impact of their plastics and recycling policies are of greater importance. For the few relatively more energy intensive holdings in the portfolio such as industrial gases business Air Liquide, the company’s carbon reduction goals are one of our key areas of focus.
Fidelity’s sustainability ratings provide the framework for focusing on the issues that matter and weighting them accordingly. Key indicators are identified and weighted according to their individual subsectors. These are supported by 130 underlying data points, alongside analysts’ qualitative assessment for each indicator.
Integrating sustainability into risk analysis
Poor management of environmental and societal risks can have a meaningful impact on future cash flows, whether through higher regulatory costs, litigation, brand erosion or stranded assets. We’ve seen examples of this with product miss-selling in the financial services industry or environmental liabilities leading to substantial fines for industrial companies. Sustainability analysis is a key part of a dividend investor’s toolkit to ensure companies are appropriately managing these risks and protecting the cash flows that support dividends.
This focus is also complementary to our emphasis on risk that is embedded throughout the strategy in order to deliver lower drawdowns than the market during stressed conditions. This begins at the stock specific level when sustainability risk is assessed alongside business model risk (will the company’s operating model prove resilient, are management demonstrating good governance in terms of capital allocation), financial risk (does the company have an appropriate level of debt on its balance sheet, are there poor environmental or societal practices that are likely to create significant off balance sheet liabilities) and valuation risk (are we overpaying for the business).
At the portfolio construction stage, we allocate the highest weighting to those stocks with lower estimated downside and lower weightings to those stocks where the range of outcomes is wider. Sustainability, therefore, forms a key building block of this multi-faceted approach to risk management.