Winner: Fidelity International
Environmental, social and governance (ESG) concerns are increasingly coming into focus in the CLO market, driven by growing investor demand. Fidelity International is SCI’s ESG CLO Manager of the Year in light of its dedication to the topic, its robust ESG positive approach and its unique sustainability framework.
One of the main differentiators of Fidelity International and its sustainability goals is its dedication in creating a unique ESG framework. “As a firm, we deeply care about sustainability and that has led us to develop an ESG framework, with our proprietary rating system first introduced in 2019,” says Michael Curtis, head of private credit strategies at Fidelity International. “This was followed by a second iteration in 2021, which was launched across the equity, fixed income and private credit asset classes.”
He continues: “These ratings cover an absolute assessment of each company's sustainability characteristics across sectors and integrate third-party data points to complement our own analysis, research and engagement insights. This allows us to create our own model, and if we get data from MSCI or other providers, we can incorporate that into our assessment. However, we rely predominantly on our own research and data gathered through engagement, rather than third-party research.”
Another differentiator for Fidelity is the way its ESG research is carried out. “Our ESG research is a fully integrated effort carried out by our internal research analysts, who directly engage with companies, leveraging existing management and key shareholder relationships. Those engagements are important to inform our view of the companies’ sustainability credentials,” Curtis says.
He adds: “Ultimately, the idea of our ratings is designed to generate a forward-looking and holistic assessment of an issuer’s exposure to sustainability risks and principal adverse impacts. The fact that we integrate ESG into our investment process also improves our investment performance over the long term.”
Fidelity’s ESG model has 127 different sub-sectors, which enables the firm to tailor questions based on relevance, dependent on which sub-sector an issuer is categorised as.
Curtis says: “We draw upon a very large data pool because we have 400 investment professionals at the firm across portfolio management, equity and fixed income. That group of people take part in over 15,000 meetings every year with companies and therefore the collection of that data improves and informs our ratings process. This firmwide integrated approach has allowed us to become the first manager to really implement and articulate an SFDR Article 8-aligned solution for CLOs.”
Additionally, Curtis explains that there are different ways CLO managers can deliver value for investors. “One is reducing your risk, by reducing the probability of default and loss. When it comes to ESG, we think our returns overall on a net basis will be higher because we manage risk effectively,” he says.
He continues: “If a company has an ambitious sustainability programme and agrees to have an independent holistic measurement of that plan over time, then we're happy to have an ESG margin ratchet linked to pre-defined targets that reduces the cost of capital if these targets are met. But that's no different from having a ratchet that has been common for decades, where if a company's credit profile improves – say, leverage reduces - it would tend to have a reduction in margin.”
Moving forward, the firm will continue to play an active role with the European Leveraged Finance Association (ELFA). “We're a co-chair of the ESG committee at ELFA and through that we are looking to collaborate with other member firms and establish best practices in order to encourage issuers to provide information to the market that we think is important,” Curtis says.
He explains: “Our role at ELFA focuses on driving issuers’ ESG adoption and also on data collection. ELFA has produced industry standard questionnaires that gather key information from issuers - not just data, but also qualitative information on the company’s activities. So, we are working to enact change in that way.”
At the same time, Fidelity is working to plug gaps in data, Curtis notes. “One of the big gaps the market has is collecting carbon emissions data, so we’ve been working on a solution. An increasing proportion of issuers are reporting carbon emissions, but we have been working on a solution for issuers that do not disclose. We have also developed a methodology where we can create estimates of a company’s carbon emissions, working with a recognised industry body and based on the company’s activities. Because those estimates are generally conservative, we would then use those figures as a base to re-engage with the borrower,” he concludes.
For full coverage of SCI’s ESG Securitisation Awards, click here.