Considering environmental, social, and governance (ESG) issues when making investment decisions is important to an increasing number of individual, as well as institutional, investors.
“Many investors are willing to pay a premium for companies that score well on these metrics, and I think the focus on ESG criteria is here to stay,” says Kevin Walenta, portfolio manager of Fidelity® Select Environment and Alternative Energy Portfolio (FSLEX).
According to Walenta, some studies show that companies that score well on ESG metrics tend to have superior stock returns, on both an absolute and risk-adjusted basis, relative to companies with lower ESG ratings.
High-scoring companies, he says, also often have above-average financial metrics, including profit margins and sales growth. “So I see it as something that’s important for all investors,” he says.
Walenta often screens for companies with high ESG scores, then uses bottom-up fundamental research to identify the firms he believes could have durable competitive advantages and generate significant free cash flow over time.
Based on this approach, the fund (as of September 30) owned shares in staffing company Robert Half International, which he says scores highly on several different ESG-related ratings systems, generates healthy free cash flow, and has a strong balance sheet. He also maintained stakes in asset manager BlackRock (BLK), consumer staples giant Procter & Gamble (PG), and card processor Visa (V).
In addition, Walenta says he engages in conversations with management teams that are committed to improving their firms’ ESG scores, and considers several to be future investment prospects.
“Not every fund holding scores highly on all ESG criteria, but I’m using the ratings information to inform my investment decisions,” he says.
Fidelity® Select Environment and Alternative Energy Portfolio held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.
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