Key takeaways

· Europe still leads on net zero, but China is making strides

· More companies are now linking senior pay to ESG issues

· Deforestation policies are becoming more common

This year’s Fidelity International ESG Analyst Survey finds tangible signs of corporate progress towards net zero, despite the impact of the war in Ukraine and an increase in the immediate demand for substitute fossil fuels (including coal) to alleviate higher prices. We asked our analysts about this transition, and they report positive developments on some of Fidelity’s key sustainability themes for 2022 such as deforestation. More analysts also report a strengthening of the link between management pay and ESG issues over the last 12 months. 

Net zero: Europe still leads but Chinese firms are starting to change

Among regions, Europe is still out in front on the transition to net zero, with analysts covering companies there reporting the highest proportion that are “leading the charge”. 

Chart 1: Europe still leading the charge on net zero

"When it comes to the transition to a low carbon economy, what proportion of your companies are likely to take the following actions?" Source: Fidelity International ESG Analyst Survey 2022.

China meanwhile has the smallest proportion of “leading the charge” companies. However, more than half of Chinese companies are starting to change, according to our analysts. This is reflected in the proportion of analysts who say Chinese companies will meet net zero by 2050, which has more than doubled from last year to 65 per cent. This is a remarkable development, reflecting strong steers from central government.

Chart 2: Increasing confidence that Chinese companies can meet net zero by 2050

"How confident are you that your companies' emissions targets are ambitious enough to meet net zero by 2050?" Scale of 1-7, where 1 is not very confident at all and 7 is very confident. Chart shows the proportion answering 5-7 (confident that targets are ambitious enough). Source: Fidelity International ESG Analyst Survey 2022.

One analyst covering Chinese industrials says: “Given the priority that China puts on net zero and increasing investor awareness, most Chinese aviation and logistics companies have started initiatives on the energy transition”. 

Several other China-focused analysts echo this sentiment that Chinese companies are responding to top-down cues following Beijing’s 2020 announcement that it is targeting net zero by 2060. However, it’s not an entirely positive story: others note that some of the country’s businesses are “still early in their ESG journey”.

As occurred last year, analysts in aggregate see more opportunity than risk from the green transition, especially over the long term. Japan stands out, with significant opportunities expected to emerge in autos, consumer staples and semiconductors over the next decade. China is also likely to benefit from green opportunities and is already a leader in areas such as solar panels.

Chart 3: Japan and China set to embrace transition opportunities

"How significant are the potential business opportunities arising for your companies over the following timescales as a result of the transition to a low carbon economy?" Scale of 1-7, where 1 is not significant and 7 is very significant. Chart shows the proportion answering 5-7. Source: Fidelity International ESG Analyst Survey 2022.

“Semiconductor tech improvement is itself a source of energy efficiency,” says one Japan analyst covering the IT sector, “while digitalisation is a source of semiconductor demand.”

More companies adopting policies on key ESG issues 

Looking more closely at companies’ actions, our analysts note several areas of progress. For example, the number of analysts reporting that the companies they cover now link senior managers’ pay to greenhouse gas (GHG) emissions has increased.

Chart 4: More companies are linking emissions to bosses' pay

"Do your companies currently link the remuneration of senior management to any of the following ESG issues?" Chart shows proportion of analysts answering that companies in their coverage link remuneration of senior management to a given ESG issue. Source: Fidelity International ESG Analyst Survey 2022.

Forty-three per cent of analysts say the companies they cover now link GHG emissions to executive remuneration (up from 34 per cent last year), while 39 per cent say their companies link senior pay to employee welfare (up from 32 per cent). Both responses are now more common than ”do not link”, although this remains the most popular answer among China and Japan-focused analysts. 

Progress on Fidelity’s core sustainability themes

Our analysts are also reporting an increase in the proportion of companies with formal policies on other environmental issues such as deforestation, which is a key sustainability theme for Fidelity in 2022, following a pledge we made alongside other investors at the time of COP26.

Chart 5: Deforestation climbs the agenda (slowly)

"What proportion of your companies have policies in place to address deforestation?" Source: Fidelity International ESG Analyst Survey 2022.

Unfortunately, there is still a majority of companies which don’t have these kinds of policies. Moreover, having a policy and having a good policy are two different things, and approaches vary across sectors. One analyst covering European healthcare finds their companies’ biodiversity policies are “mostly just lip service, high-level and feel quite boilerplate, with very few concrete examples”, while one Europe-focused energy analyst says for his sector “emissions are the priority”.

Another core theme is the just transition. This is the idea that the move to a greener economy risks economically harming some individuals and communities, such as those working in the fossil fuel industry, and that efforts should be made to mitigate these risks. Here too there are signs of incremental progress, with a greater proportion of businesses having announced initiatives to promote a just transition by supporting displaced employees.

Chart 6: Just transition initiatives on the rise

"What proportion of your companies have announced initiatives to support employees displaced by the move to a low carbon economy over the next decade?" Source: Fidelity International ESG Analyst Survey 2022.

Energy stands out as a stark exception. Not only are there very few initiatives underway to retrain workers but in another survey question we asked, 90 per cent of our energy analysts say the sector is highly vulnerable to future job losses. This suggests that workers are likely to shift sector entirely - or end up unemployed - rather than be retrained for new roles.

Progress is slow - but it is happening

Transitioning to a sustainable economy is fraught with challenges. Progress is slower than we would like but it is happening. Identifying those companies taking concrete actions - such as tackling their deforestation impact or mitigating the social impact of shifting to new technologies - is crucial to supporting the transition and allocating capital to where it can do the most good.