Sustainable, Responsible &/or ESG Policy:

The fund believes in the ownership of high-quality sustainable businesses at attractive valuations, that can offer a cross-cycle dividend based total return in excess of the global equity market, with lower drawdowns.

Corporate governance, effective management of environmental and social factors and the long-term financial performance of businesses are interdependent. Our integrated research process enables us to identify material Environmental, Social and Governance (ESG) issues to engage on with our portfolio companies. A low turnover approach allows us to engage over the long term to drive meaningful change.

The fund aims to achieve income and long-term capital growth from a portfolio made up of equity securities issued by companies throughout the world. It is part of the Fidelity’s Sustainable Family of Funds and adopts a sustainable focused strategy under which a minimum of 70% of the fund’s net assets will be invested in securities deemed to maintain sustainable characteristics / favourable ESG characteristics, as described in the prospectus.

The fund invests in listed companies worldwide with the following exclusions: adult entertainment, fossil fuel exploration and extraction, alcohol, cannabis, gambling, weapons; thermal coal-based power generation; or fossil fuel-based power generation, subject to revenue thresholds and transitional criteria. Its investment universe includes both developed and emerging markets, as reflected in its benchmark (with the exclusions mentioned above). It is not restricted to investment in stocks contained in the index. It will typically invest in companies with a free-float market capitalisation in excess of US$5 billion.

The fund’s Portfolio Manager, Aditya Shivram uses a bottom-up approach to invest in high-quality companies that offer stable and / or improving returns on capital at reasonable valuations, businesses with attractive returns, low financial leverage and predictable, stable business models. Aditya believes strong corporate governance and effective management of environmental and social factors are interdependent and positively impact the long-term financial performance of companies. Resilient, compounding dividends are an important component of total returns. A disciplined investment process ensures that the fund only invests in companies trading at attractive valuations, lowering drawdown risk.

The fund aims to have a lower carbon footprint compared to that of the MSCI ACWI Index.

Sustainability analysis is a key component of income-based equity investing, as delivering sustainable long-term dividend growth requires the management of long-term risks such as litigation, erosion of brand value, and stranded assets. As a result, sustainability assessments are integrated within each step of the fund’s investment process, allowing it to leverage Fidelity’s broad and extensive sustainability expertise. Our sustainability assessments are forward-looking and involve both quantitative and qualitative assessments, rather than simply relying on backward-looking public disclosures. This approach is intended to ensure that companies will act in the long-term interests of shareholders.

In terms of governance, we consider factors like board composition and independence, capital allocation decisions, and incentive alignment. From a social perspective, we look at areas such as training, whistle-blower and data protection policies, company culture, scope of employee ownership, and controversy records. From an environmental perspective, we also focus on the potential risks and opportunities associated with companies’ business models, as well as environmental policies and measurement frameworks.

Engagement is a key element of the fund’s strategy and portfolio turnover is typically low, which reinforces the fund’s ability to engage meaningfully with companies over extended timeframes. Engagement activity is aimed at encouraging improvements in companies’ behaviour and sustainability credentials, in order to increase our conviction in their long-term resilience and enhance value in the long term. Engagement activity can be company-specific or thematic in nature.

Process:

The investment process is well structured and repeatable, consisting of three stages:

• Idea generation
• Stock selection
• Portfolio construction and monitoring.

Idea generation

The Portfolio Manager utilises a screen of 20–25 financial metrics to filter the universe of stocks and provide him with an initial view as to the quality and valuation of a potential investment.

These metrics include current unlevered returns on capital, long term historical returns on capital, margins over a business cycle, long term growth, financial leverage, Enterprise Value (EV) based valuation metrics, dividend yield and sustainability and governance metrics such as management incentivisation and capital allocation.

In addition, the Portfolio Manager draws on the expertise of our research analysts and portfolio managers for new ideas. He is able to reference the investment recommendations of the team which highlight their best stock ideas and industry insights.

Stock selection

The ideas generated by the screens are then researched in depth by the Portfolio Manager in conjunction with the Fidelity research team. In order to form a forward-looking view of a company’s prospects, he will typically attend company meetings, read the fundamental and ESG research produced by Fidelity analysts, and read the company’s financial statements in detail.

He often also meets with local experts such as consultants, doctors, lawyers, accountants, politicians, and top regional sell-side analysts worldwide. These checks help him to establish an independent view of a company’s financial and sustainability characteristics.

Portfolio construction and monitoring

The Portfolio Manager runs a concentrated portfolio of between 35–45 stocks and maintains a high level of active money (more than 80%) in order to increase the opportunity for outperformance when compared to more benchmark-oriented disciplines. A concentrated, low turnover portfolio also allows for meaningful engagement with portfolio holdings.

• Absolute positions typically fall into the 0–5% range.
• Position sizing is based on three main parameters: the level of conviction, expected Internal Rate of Return (IRR) and downside risk.
• Core holdings are expected to have low downside risk under reasonable assumptions and sector and country weighting are a by-product of stock selection (within +/- 15% relative sector and country weights).

Positions are typically built or sold in steps over time rather than in one tranche. Typically, less than 1% positions are transitory, either entering the portfolio or on their way out. No index stocks are held for risk mitigation purposes.

The position sizing approach above ensures that the biggest positions are not necessarily the highest IRR investments but rather low downside risk investments with reasonable IRR over the holding period. This approach supports the Portfolio Manager’s focus on downside risk through the entire investment process, from idea generation and validation stages to the portfolio construction stage.

The key benefits of this IRR based approach are that it provides a robust and repeatable framework for assessing a stocks real value to the portfolio over a long-term investment horizon, based on its value today. It does not depend on correctly identifying a ‘catalyst’ unappreciated by the market which will trigger a step change in a company’s earnings or profitability.

Portfolio risk management

We consider risk at two primary levels – Individual stock specific, and portfolio construction and position sizing.

Stock specific risk: We consider this as potential for absolute capital loss. It is assessed in detail during the stock selection process. We consider stock specific risk from three angles:

• Business model risk – We look for companies with attractive and stable returns on capital, good visibility of cashflow and low variability of earnings. We analyse threats to the sustainability of future cashflows that could arise from changes in industry structure, poor capital allocation or risk management. We focus on governance and the standards of environment and social risk management as they can often significantly impact a company’s future cash flows and therefore company value.
• Financial risk – We ensure that the businesses we invest in have an appropriate level of debt given the risk of the business model. We will avoid companies with unsuitably high levels of debt or high off-balance sheet liabilities as this can lead to significant drawdowns in equity value.
• Valuation risk – Our valuation discipline ensures we do not ‘overpay’ for businesses. Given our preference for high quality, sustainable businesses, we are not aiming to buy the ‘cheapest’ stocks, but companies where the valuation provides investors with an attractive prospective return.

At a stock level, we believe the focus on mitigating business model risk, financial risk and valuation risk are the key pillars to achieve lower drawdowns for investors which is one of the outcomes we aim to deliver.

Portfolio construction and position sizing: We consider risk primarily from an absolute point of view but also monitor from a relative point of view.

The fund’s style bias and exclusion of certain stocks on sustainability criteria may result in a different return profile to the benchmark, but over a full cycle, we expect these characteristics to deliver superior risk adjusted returns and help us to meet our objective to limit drawdown. Regional and sector weightings are driven primarily by bottom-up stock selection and will be impacted by our exclusion criteria and preference for better quality businesses. Relative sector and regional relative weightings are controlled within a +/-15% range. These guidelines at a sector and regional level manage the cross-correlation at a portfolio level. We expect tracking error to be in a 3–6% range.

We typically invest in highly liquid companies, with a minimum market capitalisation of US$5 billion, which mitigates liquidity risk associated with the portfolio.

Engagement

The Portfolio Manager and broader investment team engages with holdings, with the aim of driving improvement in sustainability. Engagement topics will be determined on a case-by-case basis, highlighted by Fidelity’s proprietary ESG research and external ESG ratings. In some cases, a company will offer attractive financial characteristics but shortcomings in certain specific ESG categories. In these cases, the Portfolio Manager may choose to purchase shares in the company for the fund, while engaging to drive improvement in those areas of concern. If engagement does not yield the desired improvement within a reasonable timeframe, he will sell the fund’s holding.

Resources, Affiliations & Corporate Strategies:

At Fidelity, we are dedicated to achieving the best possible risk-adjusted returns for our investors. We believe that high standards of corporate responsibility generally make good business sense and have the potential to protect and enhance investment returns. Consequently, we integrate ESG issues into our research and investment decision-making process; we believe it has the potential to affect the long-term value of the investment.

Our integrated ESG approach is relevant across all asset classes, sectors and markets in which we invest.

ESG integration is carried out at the fundamental research analyst level within our investment teams, primarily through the implementation of Fidelity's proprietary ESG Rating. This rating leverages our internal research capabilities and our engagement with companies to inform our view on a company’s sustainability credentials. Please refer to our response to question B6 for detailed information on Fidelity’s proprietary ESG Rating and other proprietary tools that support our internal research process.

The cornerstone of our investment approach is bottom-up research. As well as studying financial results, our portfolio managers and analysts are dedicated to carrying out additional qualitative analysis of potential investments. They visit companies in person, examining everything that could have an effect on its business, from the shop floor to the boardroom. Customers and suppliers also come in for scrutiny. In this way we can develop a 360-degree view of every company in which we invest and ESG factors are regularly considered in this research process.

Our approach to integrating ESG aspects into our investment processes is detailed in the following policies, with all documents accessible via the following website: https://professionals.fidelity.co.uk/sustainable-investing/our-policies-and-reports:

Sustainable Investing Principles: The document sets out the guiding principles and minimum requirements for Fidelity’s sustainable investing activities across asset classes and geographies. The Sustainable Investing Principles build on our beliefs to set out our sustainable investing frameworks, our approach to sustainable client solutions, exclusions, investment stewardship and engagement, the integration of ESG risks and opportunities across our investment management process, and an overview of compliance with regional sustainability regulations.

Exclusion Framework: Our Exclusion Policy forms part of our sustainable investment policy and defines the main requirements for an effective exclusion framework applicable throughout the organisation.

Engagement Policy: Our Engagement Policy sets out how Fidelity undertakes stewardship and shareholder engagement across our listed equity and fixed income holdings.

Voting Policy: Our sustainable investing voting principles and guidelines document provides information on how we exercise ownership rights through voting to improve sustainable business behaviour and client returns.

Climate Investing Policy: Our Climate Investing Policy details how we plan to work with stakeholders to reduce climate risk across all investment strategies in a way that aligns with our foundation in active, bottom-up research.

We use a combination of internal and external resources.

Internal

The bulk of the engagement and analysis is carried out by our research analysts who strive to go beyond studying just financial results and look to incorporate ESG and other factors into a measured viewpoint. They are supported by our team of 38* sustainable investing specialists who engage with companies on issues like corporate governance (for example, board structure, executive remuneration), shareholder rights (for example, election of directors, capital amendments), changes to regulation (for example, green house gas emissions restrictions, governance codes), physical threats (for example, extreme weather, climate change, water shortages), and so on. Our sustainable investing specialists engage with senior management of investee companies as well as their Socially Responsible Investment (SRI) / ESG professionals. They access external ESG-themed research as well as the company ratings based on ESG factors that an external vendor produces.

Fidelity has developed a proprietary ESG Rating Framework, leveraging our internal research and interactions with issuers. The rating is designed to generate a forward-looking and holistic assessment of ESG risks and opportunities. Analysts qualify the direction of change of companies’ ESG performance (positive, neutral or negative trajectory). The ESG ratings and full company reports are accessible on our centralised research management system, Fidelity Insight, so that each analyst has a first-hand view of how each company under their coverage is rated according to ESG factors. In addition, ESG ratings are included on our analyst research notes. These notes are published internally on Fidelity Insight and form an important part of our investment decision.

Fidelity has also developed an SDG mapping tool, which provides the percentage of an entity’s or portfolio’s alignment with each SDG, and where relevant the underlying targets and indicators. This provides a quantitative, transparent, and consistent approach to measuring the alignment of portfolios against the underlying targets and indicators behind the SDGs.

Additionally, we have been developing our proprietary Climate Rating which utilises our fundamental research capabilities to identify climate risks, net zero investments and targets for transition engagement within the Fidelity investment universe. It assesses which companies are in the best position to transition to net zero, or have a positive trajectory towards transition.

The Climate Rating is designed to complement our broader ESG Ratings, which already incorporate climate change factors.

Climate Ratings have been assigned to over 2,000 issuers so far, with the objective to further scale up this coverage over time. We will use various approaches, including the Climate Rating, to set individual fund decarbonisation targets appropriate to each fund’s investment strategy and universe. We will gradually increase targets to reach 100% alignment with the Paris Agreement in every fund by 2050.

Carbon emissions data is available via Insight and is accessible to all analysts and portfolio managers. This data includes (but is not limited to) portfolio carbon emissions and intensity, weighted average carbon intensity, top emitting holdings, emissions attribution analysis, scenario analysis, physical risk assessment, fossil fuel reserves and green/brown share of electricity generation (from held utilities).

*Source: Fidelity International, as at 31 March 2024. Excludes China AMC resources.

External

Fidelity is a signatory to many industry initiatives such as the Principles for Responsible Investing (PRI), UK Stewardship Code and the Japanese Stewardship Code. We are also active members of the Asian Corporate Governance Association, Assogestioni, the UK Sustainable Investment and Finance Association, the UK Investor Forum and many other trade and industry bodies around the world.

Fidelity uses a number of external research sources globally that provide ESG-themed reports, research, ratings and data on themes such as corporate involvement in verified or alleged failures to respect international norms, for example the Ten Principles of the United Nations Global Compact (UNGC) as well as on carbon emission, fossil fuel and power generation. The coverage of companies varies by provider and the providers currently cover more than 10,000 companies globally.

We also subscribe to a number of corporate governance and voting advisory services, including products supported by Institutional Shareholder Services (ISS) and Glass Lewis, to MSCI for ESG data and to ISS for carbon footprint metrics.

We constantly explore new data sets and approaches that can provide enhanced insights into companies.

Sustainable Investing Team

Fidelity has a Sustainable Investing Team, which includes sustainability and stewardship professionals covering various subject matter areas and competencies. The Sustainable Investing Team is part of Fidelity’s Investment Team and it supports Fidelity’s investment analysts and portfolio managers to monitor, analyse, and engage with investee companies.

Fidelity’s Sustainable Investing Team has expanded to 38* members (2020: 13 members) to meet the growing demands for sustainable research, thought leadership and support for analysts and portfolio managers. The scope of the team’s work now covers a broad array of activities related to ESG integration, engagement, policy, product development and sales and marketing, as well as proxy voting.

Located in seven locations across Europe and the Asia Pacific region the Sustainable Investing Team covers a broad range of skills, including research, policy, climate science and governance. The team has a broad range of professional experience and diversity of tenure. Some specialists of the team have worked in similar roles throughout their career, while others have transitioned to sustainability over the course of their career development. The team is also diverse in terms of gender and national origin. When adding new members to the team, we have prioritised improving the team’s skillset to support our organisational stewardship objectives, as well as supporting the development of young talent in the firm, through our graduate intake.

The continued build out of our Sustainable Investing Team ensures that we remain able to meet the evolving needs of our clients and other stakeholders. New members have brought skills to complement and add to the existing capabilities of the team, including legal expertise, thematic expertise (for example, climate), client and distribution expertise and additional governance expertise.

The team will continue to evolve based on our sustainable investing strategy and aim to service all areas of the business. For example, we are planning to hire experienced asset class leads, growing the breadth and depth of our sustainable investing process and product offering. Fidelity’s investment analysts are responsible for researching companies under their coverage, leveraging the expertise of the Sustainable Investing Team as appropriate. Under this approach, ESG is fully integrated in the investment process. This collaboration has improved quality and outcomes of engagement across asset classes.

*Source: Fidelity International, as at 31 March 2024. Excludes China AMC resources.

Oversight of ESG at Fidelity

The following individuals and teams are responsible for maintaining and integrating Fidelity’s ESG policies:

• The board members of FIL Limited (the ultimate holding company of the group that trades as Fidelity International) have oversight and accountability for sustainable investing. The Sustainable Investing Team reports to the board on its activities at least once per year. The board approves any changes or amendments to our Sustainable Investing Principles, including our voting guidelines.
• A Sustainable Investing Operating Committee (SIOC) was formed in 2017. The purpose of the group is to ensure a comprehensive oversight of all ESG matters within the company across all jurisdictions and business areas. The group is comprised of members of our senior management team representing all asset classes. The SIOC meets monthly to review any ESG company policy changes, industry developments, client requirements, new product innovations and regulatory updates, and will ensure the alignment of all active ESG initiatives across the company. Ad-hoc meetings may be called to address pressing issues that may arise that need addressing in advance of the next scheduled meeting.
• Andrew McCaffery, our Global Co-Chief Investment Officer Fixed Income, Multi Asset and Private Assets (and a member of our Global Operating Committee (GOC)) also has oversight and accountability for our sustainable investing strategy and activities globally.
• Jenn-Hui Tan, our Chief Sustainability Officer, oversees Fidelity’s strategy and policies on engagement, voting and ESG integration across our active product range. He manages our dedicated Sustainable Investing Team that is comprised of 38* sustainable investing specialists, based in London, Singapore, Hong Kong, Shanghai, Melbourne, Sydney and Tokyo, who work closely with the investment management teams globally across all asset classes. They are responsible for consolidating our approach to ESG integration, engagement and voting.
• Our heads of research are also directly involved in the implementation of sustainable investing principles and procedures in the company. Specifically, our global head of research has final approval on which external ESG research vendors we engage.
• Fidelity’s research analysts have overall responsibility for analysing and rating the ESG performance of the companies and buildings in which we invest. Our portfolio managers are also active in analysing the potential effects of these factors when making investment decisions, ensuring that each stock in the final portfolio adheres to the strategy’s and clients’ ESG requirements.
• The Compliance Monitoring Team monitors the portfolios with screening criteria systematically through hard-coded restrictions in the investment guidelines.

*Source: Fidelity International, as at 31 March 2024. Excludes China AMC resources.

Industry collaboration

Fidelity recognises the importance of networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning. Fidelity is a member or signatory to the following:

• #10000 Black Interns
• 30% Club Australia
• 30% Club Hong Kong
• 30% Club Investors Group
• 30% Club Japan
• 40:40 Vision
• Asia Investor Group on Climate Change (AIGCC)
• Asia Securities Industry and Financial Markets Association (ASIFMA)
• Asia Research & Engagement (ARE)
• Asian Corporate Governance Association (ACGA)
• Assogestioni
• BBBA Talent Accelerator
• Black North Initiative
• Black Young Professionals
• Bright Network Women in Leadership
• Catalyst After School Programme (CASP)
• CDP (formerly Carbon Disclosure Project)
• Climate Bonds Initiative (CBI)
• Climate Investment Summit (CIS)
• Coalition for Climate Resilient Investment (CCRI)
• Corporate Governance Forum (CGF)
• Council for Sustainable Business (CSB)
• Disability:IN
• Diversity Project
• Edinburgh Airport Sustainability Pledge
• Environment management system standard ISO 14001
• European Public Real Estate Association (EPRA)
• European Sustainable Investment Forum (EUROSIF)
• Farm Animal Investment Risk and Return (FAIRR)
• Finance for Biodiversity
• Finance for Biodiversity Pledge
• Glasgow Financial Alliance for Net Zero (GFANZ)
• Global Standard on Responsible Corporate Climate Lobbying
• Green Finance Industry Taskforce Singapore
• Green Praxis biodiversity
• Hong Kong Green Finance Association (HKGFA)
• Hong Kong Principles of Responsible Ownership (Stewardship code)
• Inspiring More Sustainability (IMS)
• Institutional Investors Group on Climate Change (IIGCC)
• International Corporate Governance Network (ICGN)
• International Regulatory Strategy Group (IRSG)
• Investment Association (IA)
• Investor Agenda
• Investor Forum (in the UK)
• Investor Group on Climate Change (IGCC)
• Investors Against Slavery and Trafficking Asia-Pacific (IAST Asia Pacific)
• Japanese Stewardship Code
• LGBT Great
• Lord Mayor's Appeal
• Lord Mayor's Appeal - We Can Be (Previously 'She Can Be')
• Maastricht University & (GRESB)
• Mental Health First Aid Training (MHFA)
• MSDUK
• (Minority Supplier Development UK)
• Natural Capital Investment Alliance (NCIA - part of Sustainable Markets Initiative)
• Net Zero Asset Managers Initiative (NZAMI) (led by IIGCC)
• One Planet Asset Manager initiative (OPAM) [One Planet Sovereign Wealth Fund (OPSWF)]
• OutBritain
• Partnership for Carbon Accounting Financials (PCAF)
• Point Zero Carbon Programme
• Powering Past Coal Alliance (PPCA)
• President’s Challenge Enabling Employment Pledge and Enabling Mark
• Principles for Responsible Investing (PRI)
• Purposeful Company
• Race at Work Charter
• Responsible Investment Association Australasia (RIAA)
• Social Enterprise UK (SEUK)
• Social Mobility Foundation (SMF)
• Stonewall
• Sustainable Trading
• Taiwan Stock Exchange’s Stewardship Principles for Institutional Investors
• Taskforce on Nature-related Financial Disclosures (TNFD) Forum
• Trans in the City - Campaign Trans Rights are Human Rights
• Transition Pathway Initiative (TPI)
• World Benchmarking Alliance (WBA)
• UK Stewardship Code
• (Financial Reporting Council (FRC))
• UK Sustainable Investment and Finance Association (UKSIF)
• European Sustainable Investment Forum (EUROSIF)
• UN Climate Change Conference (COP26)
• UNFCCC - Signatory to COP26 Financial Sector Commitment on Eliminating Agricultural Commodity-Driven Deforestation
• (Initiative re-named to Forest Sector Deforestation Action FSDA)
• Valuable 500
• Veteran Owned UK
• WeConnect International (Social Enterprise UK)
• WEF Stakeholder Capitalism Metrics
• Women in Finance Charter
• Women on Boards
• WorkWell Leaders

Dialshifter

Our organisation is helping to support the Paris Climate Agreement and the Race to Net Zero by…

We take a pro-active approach to minimising our own environmental footprint. We are committed to achieving net zero emissions by 2030 for Fidelity International’s operational emissions (including all Scope 1, 2 and 3 emissions we have direct control over). Our focus will be on the reduction of emissions through operational changes and investment in operational efficiencies, on-site renewals and purchasing of renewable energy whilst offsetting those we are unable to eradicate.

The goal at Fidelity is to conduct current and future business operations in a sustainable manner which helps create a better future for the environment. Fidelity ensures Environmental Sustainability is managed as any other critical business activity in an integrated, systematic way. The framework is designed to ensure Pollution Prevention, Carbon Reduction, Waste minimisation, responsible use of resources and compliance with legislation through good practice and continuous improvement.

Fidelity’s Commitment: 

• Manage Environmental Sustainability requirements in a systematic way aligned to the environmental management system standard ISO 14001;
• Develop carbon, Natural Resources and Waste data systems to effectively monitor and analyse performance; 
• Continuous improvement through setting realistic objectives to ensure sustainability management is improved in line with resources;
• Complying with legal and other mandatory requirements in relation to sustainability issues;
• Providing adequate control of environmental risks arising from our work activities and operations, including Pollution Prevention;
• Develop an environmentally sustainable culture where every employee can contribute towards Fidelity International goal to create a better future for the environment;
• Ensure effective communication and consultation on Environmental Sustainability with employees keeping them informed, motivated, and suitably trained;
• Ensure that business strategies, via the Environmental Sustainability Group, integrate Environmental Sustainability requirements;
• Reduce our consumption of resources (energy, water, materials, packaging), where feasible;
• Minimise Waste through a commitment to the Waste hierarchy to reduce, re-use, recover or recycle Waste, where feasible;
• To pursue Energy Efficiency in the design, maintenance, management and operation of our owned/operated buildings;
• Seek to use products that have the least possible environmental impact; and
• Reviewing and revising this policy, as necessary, at regular intervals.

Reports on environmental performance are produced covering a range of areas including energy management, carbon footprint, waste reduction, water usage and recycling. This data is collated on a monthly basis and communicated to Senior Management on a regular basis.

Our environmental management policy is based around our ability to obtain regular, accurate information on our environmental performance, not only in energy use and waste management, but also areas such as monitoring our carbon emissions in (for instance) air travel.

We receive regular reports from our incumbent service providers, and collate these for review. We then hold regular meetings with them to investigate areas for improvement. Where the meetings produce ideas which may help reduce the environmental impact of our operations, they are implemented and monitored. Where successful, they are incorporated into our procedures.

Fidelity’s corporate sustainability team have initiated carbon footprinting for a number of offices in recent years and are consolidating that in 2020 to produce global carbon emissions for Fidelity’s activities.

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