Sustainable investing: 5 questions answered on ESG ratings

ESG ratings are one of the best tools available to investors who want to understand sustainable investing and the sustainability levels of the companies they invest in. In the rapidly evolving world of environmental, social and governance (ESG) investing, these ratings are an easy way for you to assess a company’s environmental and societal impact.

Here are five things you need to know to help make sense of ESG ratings: what they are, why we use them and how they can help you.

1. What exactly are ESG ratings?

An ESG rating is an evaluation of how well a company proactively manages environmental, social and governance issues. It is designed to help investors make sense of the ESG risks attached to the companies they might invest in. Here at Fidelity, we have developed our own ratings system that we integrate into our standard company research. That means ESG analysis is embedded int our entire investment approach and we may use third-party research data, such as MSCI, to supplement our own research.

2. What do Fidelity’s ESG ratings look like?

Our analysts assign a rating of A (best) to E (worst) for each company we assess. An A rating represents a company that has clearly understood and is proactively managing the ESG issues that can affect the long-term shareholder value of the company. An E rating represents the inverse.

3. How does Fidelity’s ratings system differ from those of other firms?

Fidelity’s ESG ratings are based on our bottom-up company research and our regular interactions with management teams and boards of companies within our universe of 4,000 issuers. We seek to measure a company’s current sustainability practices, not just its previous sustainability disclosure, and we anticipate how this might change over time. Our ratings are therefore fundamentally forward-looking in nature.

We believe a meaningful ESG assessment requires a deep understanding of the company’s business operations and management track record that can only be offered by an experienced investment team. That’s key for us. We don’t create our ratings in isolation. Our investment analysts consider sustainability alongside everything else we look at when assessing a company.

4. How does Fidelity assign a rating?

The ratings are assigned by Fidelity’s team of investment analysts across the world. Our analysts work in collaboration with each other across asset classes, conducting more than 16,000 company meetings every year, and they update the ratings at least annually or on the occurrence of a significant ESG event.

We’re looking for four things in particular: awareness, action, results and direction of change. That means we’re concerned with a company’s future ambitions just as much as its past action. It’s important for us to know whether a company is heading in a “stable,” “improving” or “deteriorating” direction. We’re looking forward rather than backward: we believe that’s where value lies for investors, and it sets our ratings apart.

5. Are there any other ways for investors to assess their companies’ sustainability levels?

Ultimately, there is no substitute for investors carrying out their own due diligence and forming their own views of a company’s sustainability characteristics. It is important in this process to dig beneath the surface and not simply accept a company’s written public disclosure as evidence of its sustainability, and also to consider how genuine is its stated beliefs and practices regarding environmental and societal issues. It may also be helpful to compare companies with their peers in related sectors and geographies, as best practices in this space are moving fast. ESG ratings are designed to be a guide in helping our investors to form their own views.

Want to learn more about sustainable funds? Check out the following funds from Fidelity: