| ORGANISATION DETAILS | |
|---|---|
| Name | Fidelity International |
| Signatory type | Asset manager |
| Region of operation | Global |
| Assets under management | US$812.8bn (as of 31 December 2021) |
| COVERED IN THIS CASE STUDY | |
|---|---|
| Asset class (strategy) | Listed equity (active investing) |
| Geography | China |
| ESG issues | Environmental and social issues: packaging and safety management |
Why we do it?
Sustainability is a core component of Fidelity International’s investment process. To us, sustainable investing is about mobilising the power of capital to galvanise corporates to conduct their business in a more sustainable manner. To achieve that goal, capital needs to be directed in a way that favours companies that are already performing well or which are making genuine efforts to improve. Investors also need to act as responsible stewards of their investee companies through regular engagement and diligent voting to ensure companies continue to advance on their sustainability journey.
This applies to all markets, including China. But in markets where most companies are just starting out on this journey, such as China, stewardship plays an even more significant role. This is because most companies well understand the importance and ever-increasing business relevance of their sustainability practices but need guidance or even handholding as they get started. Through engagement, companies can obtain better clarity on investor expectations, learn about the practice and progress of their peers, and become informed about the resources available that can assist their efforts. Investors, in turn, gain better insights into companies’ thinking and plans. Given the general lack of quality disclosure, this is indispensable for investors seeking to assess the sustainability practice of companies in emerging markets.
The importance of voting is also true for China. We see voting as a right but also a responsibility. Diligent voting, where not only every vote is cast, but where each is cast with proper deliberation, serves as a constant reminder for companies that investors are actively engaged and, when needed, will not hesitate to use their votes to drive corporate change.
How we do it?
As with ESG analysis, at Fidelity stewardship is embedded in our core investment capabilities, where our sector analysts and portfolio managers conduct ESG engagements with companies and make voting decisions according to our voting policy. Our in-house sustainable investing team (the SI team) acts as an enabler by providing the domain knowledge and expertise. This, combined with our analysts’ deep company and sector understanding, allows us to identify the ESG issues that are relevant for each company and have conversations that are much more in-depth. Our analysts also meet companies frequently, at least once a quarter. This ensures continuity in our engagement, because, in addition to the dedicated ESG meeting which generally happens once or twice a year, quick discussions to follow-up on previously discussed ESG topics take place during regular management meetings to discuss operations and financials.
Our engagement approach in China is generally the same as in other jurisdictions, but our engagement activities here differ in breadth, frequency and tactics. Given many companies are at the early stages of their sustainability journey and disclosure is still often lacking, we find it necessary to engage with a larger base of companies. These engagements often need to cover a wide range of issues, which makes more frequent engagement helpful. Carefully crafting suggestions into constructive feedback instead of direct criticism is also important, particularly for the first few meetings. Lastly, it’s not yet common for independent directors or even executive directors to meet investors, which makes letter writing and attending shareholder meetings an important tool to deliver messages to the board when needed.
Voting is centrally managed by the SI team, which votes on all routine resolutions according to our voting policy, which has been discussed and agreed to by our investment team. Non-standard resolutions are reviewed and discussed with the relevant analysts and portfolio managers. This structure works particularly well in China, where shareholder approval is required for many investment proposals that are typically within the board’s decision authority in other markets. The fundamental insights from the investment team in evaluating such proposals are extremely important and are generally lacking in proxy research.
Case study
Engaging with an express delivery company to improve packaging and safety management
Our engagement with China’s top express-delivery company is a good example of how effective engagement can lead to positive change. Our sector analyst started a dialogue with its management about three years ago to understand its ESG practices. He was positively impressed by the company’s approach to managing its environmental footprint and relations with key stakeholders. He suggested the company could be more transparent and consider setting up a proper governance structure to ensure continuing progress. He explained to the company, issue by issue, what disclosure is relevant for investors. He also suggested that a more explicit linkage between executive remuneration and ESG performance would offer stronger assurance to the market regarding the company’s sustainability commitment. We were pleased to see the company becoming China’s first express delivery firm to publish regular sustainability reports in both Chinese and English. Furthermore, the company made the pioneering move in China of linking executive compensation to sustainability performance. Amplifying the impact of this engagement, others in the industry took notice of the company’s sustainability push and started to follow suit. With more than 200 million parcels on average moving around China daily, sustainable practices in this sector can have huge environmental implications.
As we continued to engage with the company, the discussion moved on from disclosure and sustainability governance to specific environmental and social practices. Environmentally, a key advance made by the company in the last three years was the reduction of paper waybills. With the use of e-waybills and smaller sheets of paper, the company has reduced paper consumption per package by 70 per cent, saving some 50,000 tons of paper each year. In addition, the company has joined the Science Based Targets initiative, as it seeks to cut carbon emissions further. Electric fleets have been deployed for the entire collection and delivery processes, while recyclable transfer bags are also widely used. On the social front, the company has set up a special fund for protecting the health and safety of frontline workers. Through more effective safety management, the company reduced its lost-time injury rate to 0.68 hours per 200,000 working hours in 2020 from 1.28 hours in 2018.
During our engagement this year, we made new suggestions to the company, including that it widen its carbon reporting scope to cover franchised operations. The company has been receptive to investor feedback, and we are confident in seeing continuing improvement.
Challenges and recommendations
Effective engagement needs to be built on a good understanding of company practice. With ESG reporting not yet mandatory, we often need to spend the first few engagements on fact-finding before moving to discussing specific issues in more depth and making suggestions. We believe making ESG disclosure mandatory will great improve the effectiveness of engagement.
While we have noted a positive trend in the voting participation among local investors, as highlighted in our 2020 China Stewardship Report, local institutional investors are still not voting in a systematic manner nor are they disclosing their voting records. We therefore often find ourselves still a lone voice in voting, which makes the collective voice of public investors weaker than it should be. We believe that making voting mandatory for local institutional investors or adopting a stewardship code that encourages more active and transparent voting activities could address this issue effectively.
