Fidelity International--whose holdings total $787.1 bn--intends to hold companies accountable for investments that do not take into account climate change or gender diversity requirements in their operations by using its voting rights as a shareholder.
Fidelity has always had a tradition of shareholder engagement, says Jenn-Hui Tan, global head of sustainable investment and management. “A commitment in line with the promise made to clients to deliver long-term value for their investments," he explains.
Management now wants to take this commitment to the next level, Tan says. "We want to use our voting rights as an integral component of our investment process. At Fidelity, we have always believed that exercising our ownership rights by voting at company meetings is a fundamental responsibility of shareholders. Through the use of engagement and voting, we aim to improve the governance and sustainability behaviours of the companies we invest in."
A "soft power" approach
The aim is to promote good practice, "to start a dialogue and send a message", in the belief that Fidelity's weight will allow it to have a sufficiently strong voice at general meetings.
It is a "soft power" approach that could go as far as sanctions, Tan suggests. "We believe that positive engagement is the most effective way to change behaviour. Our preference will always be to encourage rather than exclude, but we are prepared to go as far as total divestment if we feel that the companies in which we invest are not taking the right path and do not meet our expectations."
The intermediate step would be to vote against the management of a company that behaves irresponsibly in regards to environment, social and governance (ESG) criteria.
Even if the approach applies to ESG criteria as a whole, two areas of activism are highlighted, including climate change. “A change that poses a major risk to the long-term profitability and sustainability of businesses,” says Tan.
“While it is accepted that limiting global warming to no more than 1.5°C above pre-industrial levels will require a radical transformation of the world economy, affecting most areas of human activity, there is still a gap between awareness and action," he says.
It is to bridge this gap that the manager is calling on companies to take concrete steps to manage the impacts of climate change and reduce their greenhouse gas (GHG) emissions and to publish specific and appropriate information on emissions, targets, risk management and monitoring. "At Fidelity, we are working with our peers in the net zero asset managers initiative to support the transition to net zero emissions globally," says Tan.
In terms of diversity and gender, Fidelity has set minimum targets of 30% board gender mix in developed markets and 15% in all other markets.
"A growing body of research shows that organisations that promote diversity are more productive and successful. Diversity brings significant benefits in terms of risk mitigation, decision making, governance and we want our companies to reflect the benefits of that diversity."
Companies have been informed of Fidelity’s new approach and have until 2022 to prepare.