Asia is in the early stages of its sustainability journey, but it is for this very reason that it offers such an exciting opportunity for investors. Against this backdrop, Fidelity Sustainable Asia Equity Fund portfolio manager Dhananjay Phadnis discusses the important role that engagement can play in influencing corporate behaviour and creating more sustainable investment outcomes.
Relative to European markets, Asia is in the early stages of its sustainability transition, but this is what makes the region so interesting and attractive. Although investors have to contend with weaker ESG disclosure and less independent shareholding structures, the good news is that Asian companies are rapidly catching up with regard to ESG approaches.
Many of the companies we speak to are just starting to make operational and disclosure improvements to reduce risks and deliver performance. Fidelity’s approach is to be actively engaged in this maturation process, so that we can act as partners for companies in their journey towards better sustainability.
The Fidelity Sustainable Asia Equity Fund has the dual objective of delivering attractive returns through a portfolio of 50-70 high quality growth stocks – and doing so in a manner that is sustainable. We have long held the conviction that companies that are run on sustainable principles, take care of their stakeholders, and strive for continual improvement are ones that can deliver long-term value for investors.
The power of engagement
In addition to an enhanced focus on ESG criteria, we also place significant emphasis on engaging with individual companies to help influence more sustainable investment outcomes. Our approach in this regard is one of partnership – companies in Asia are trying to improve their ESG practices but they need guidance as they start out – and they tend to reach out to investors that they trust, such as Fidelity.
We take a structured approach to our engagements both in terms of issues discussed and frequency. On the discussion topics, we identify the issues that are material to that company and also take into account any controversies. These points are discussed with the companies alongside specific suggestions on what can be done to address them. This helps us to understand the company’s progress thus far and the plans they are putting in place.
Notably, we’ve seen remarkable success in terms of getting Asian companies to speak to us because of our reputation as a long-term investor and business partner. Examples include Singapore and Korean banks on coal-related financing as well as Asian semiconductor companies on corporate governance and shareholder return policies. We have also had an impactful engagement around stranded seafarers. We are also working with a global electronics group to use their influence as one of the biggest household consumer brands to persuade their key suppliers to reduce their carbon emissions – we think this could prove an extremely effective approach.
Current market observations
The trajectory of the Covid-19 pandemic and global central bank policies continue to be some of the key factors affecting the near to medium term outlook for Asia ex Japan equities. Central bank liquidity needs to be monitored closely as any abrupt normalisation will bring back memories of the tapering we saw in 2013, which had a meaningful impact on global emerging markets.
As we move forward, the reopening of Asian economies hinges upon vaccination rates and the ability of these vaccines to continue to be effective against virus variants. North Asia’s relatively successful control of the virus has been reflected in superior market performance over the last six to 12 months.
The key laggards both in terms of recovery from Covid-19 and market performance are the ASEAN countries. This is also where the opportunities lie. We have been increasingly spending our time looking for new investments in these markets and are gradually adding to existing holdings.
More recently, we have initiated a new position in Thailand and participated in two IPOs/placements in the Philippines. This included consumer staples firm Monde Nissin, a leading instant noodles and biscuits maker and the UK’s largest meat alternatives manufacturer, which is looking to expand in Germany and the US. The company stands out versus its peers from an ‘environmental’ and ‘social’ perspective as meat substitutes are more ethical and environment friendly. The demand for such products if growing rapidly due to consumer concerns about health, sustainability, and animal welfare.
As bottom-up stock pickers, we also continue to find select opportunities in North Asia, although we remain mindful and disciplined on valuations. For example, the recent focus on the renewables sector has meant that valuations in certain areas like renewable energy, electric vehicles and the hydrogen supply chain have become quite stretched. While these themes have a long way to run, the underlying stocks can be very volatile, especially when they are already pricing a lot into the future. While we have exposure stocks within these sectors, we continue to be focused on high quality companies, run by strong management teams and where valuations are reasonable.
This content is for investment professionals only and should not be relied upon by private investors.
The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. The Fidelity Sustainable Asia Equity Fund has the potential of having high volatility either due to its composition or portfolio management techniques. It can use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. A focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security’s ESG credentials can change over time. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0721/36118/SSO/NA