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Fidelity U.S. Sustainability Index FITLX Sustainability

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Sustainability Analysis

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Sustainability Summary

 | Published as of .  Based on data as of

Fidelity U.S. Sustainability Index Fund has several promising attributes that may appeal to sustainability-focused investors.

This fund has a Morningstar Sustainability Rating of 5 globes, indicating that the ESG risk of holdings in its portfolio is rather low relative to those of its peers in the Morningstar US Equity Large Cap Blend category. ESG risk measures the degree to which material environmental, social, and governance issues, such as such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

Fidelity U.S. Sustainability Index Fund holds itself out to be a sustainable or ESG-focused investment. In other words, ESG concerns are central to the investment process of this strategy. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. One key area of strength for Fidelity U.S. Sustainability Index Fund is its low Morningstar Portfolio Carbon Risk Score of 4.87 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy.

By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and small arms. Yet this goal is far from achieved, as the fund exhibits 0.24% and 0.38% exposure to controversial weapons and small arms, respectively. This compares with 1.57% and 0.86% for its average peer in the US Equity Large Cap Blend category. The fund has relatively high exposure (11.53%) to companies with high or severe controversies. Controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Examples of types of controversies include bribery and corruption scandals, workplace discrimination and environmental incidents. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. Such controversies can also damage the reputation of both companies themselves and their shareholders.

The fund's 14.6% involvement in carbon solutions is roughly in line with the 13.1% average involvement of its peers in the Large Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.

ESG Commitment Level Asset Manager

 | Low , 

Geode, which sub-advises most of Fidelity’s index funds, warrants an ESG Commitment Level of low. The firm has made strides to enhance its ESG efforts over the past few years, but its resources dedicated to ESG research and active ownership activities are still limited. After signing the UN PRI in 2017, the firm established an ESG Committee to craft its ESG proxy voting guidelines, which apply to both ESG-focused strategies and conventional funds. It also hired a third-party corporate engagement service, which engages with companies on behalf of a consortium of investors. These engagements are intended to prod companies to improve their ESG practices. In the Spring of 2020, Geode went a step further and started to engage directly with portfolio companies. These engagements fall under the purview of a newly added proxy voting manager, who sits on the compliance team and oversees proxy voting across all the firm’s portfolios. The proxy voting guidelines and framework for setting engagements that have been disclosed are vague and the resources behind these efforts are still limited. That said, Geode supports ESG shareholder proposals more often than many of its peers. Index portfolios represent the bulk of the firm’s assets, but there are not ESG adjustments beyond what is in the index. The firm currently manages only one ESG index portfolio and does not currently have a standing team of ESG analysts. For its actively managed quantitative funds, Geode recently started to incorporate changes in ESG ratings from MSCI. The investment team treats this ESG factor just like any other performance-enhancing factor in its active stock selection model. It may own ESG laggards if they look sufficiently attractive on other metrics, or if their ESG ratings are improving.