Fidelity’s sustainable thematic fund that is named to focus on the impact of “environment and alternative energy”, FSLEX, involves mainly technological, commercial, and industrial companies. The majority (56.76%) of FSLEX’s portfolio is in the energy efficiency sector. The diversification in terms of the geographic distribution of FSLEX is very low with 97.57% of the portfolio domestically from the United States. FSLEX has 53 holdings as of 6/30/2021 and the top 10 holdings include major corporations like Microsoft Corp, Tesla, Honeywell Intl Inc., and Cisco Systems Inc. which also make up over half of FSLEX’s portfolio. Fidelity Environment and Alternative Energy Fund’s sustainability efforts in the name of investment value remain surface-level. As seen with the vague holding selection process, consumers’ environmental values by investing in FSLEX will not be met with the same confidence that they can find in other sustainable funds.
The Fidelity Environment and Alternative Energy Fund has $501.94 million in net assets with over 80% of their assets invested in securities that they deem to engage in renewable energy, energy efficiency, and environmental support services like waste technology. FSLEX has mid to large-size cap stocks which leave out emerging markets and contributes to their higher volatility.
The largest holder in FSLEX is Tesla making up 12% of the holdings. Tesla manufactures electric vehicles that are now seen as environmental competitors to the common natural gas vehicle. However, Tesla has been swept up in previous EPA violations for hazardous waste management as well as labor equity disputes from the Occupational Safety and Health Administration. Following behind Tesla, Honeywell makes up 7.7% of FSLEX’s portfolio. With such a large hold in this “sustainable” fund’s portfolio, Honeywell’s environmental impact on the world contrasts FSLEX’s mission statement that emphasizes the importance of energy-efficient products. With previous controversies in extreme toxic waste in Superfund sites and dangerous waste management, it seems like the environmental ethics behind this holding is not in alignment with what Fidelity claims the fund is investing in. The third-largest holder in the Fidelity Environment and Alternative Energy Fund is Danaher Corp, a medical and industrial conglomerate, who holds 5.1% of net assets.
Altogether with the top 10 mainly industrial and technological company holdings, that contributes to the fund’s Morningstar ESG rating of 26.05 indicating ESG risk that is on the higher end of risk but slightly below the global category average risk for industrials sector equity. This is all contributed by how many of the fund’s top holdings individually have high ESG risk ratings accumulating to this sustainable fund’s unsustainable risk rating.
Fidelity’s Environment and Alternative Energy Fund is categorized as an active thematic ESG fund which means that the fund is supposed to prioritize socio-environmental impact while also increasing financial profits. However, with a 3/5 Morningstar rating, the reality of FSLEX’s positive environmental impact is more complicated.
The holding selection process for this fund as said by FSLEX’s portfolio manager is focused more on investor popularity and maintaining the balance between fund earnings and reduced carbon footprint. Investor popularity has mainly grown in the alternative energy sector a lot because of the high growth and long-term returns from these stocks. However, there should be more evidence of how each holding contributes to the long-term reduction of carbon emissions. Fidelity also says that they use “robust screening” and extreme analysis for all their impact investment funds. However, the inclusion of brands with historic controversies like Honeywell presents a contrast to their promised screening process. Transparency is necessary for sustainable funds to measure up to the supposed environmental impact they make and FSLEX needs to materialize their sustainability promises.
Fidelity Investments Inc. was founded in 1969 and is based out of Boston, Massachusetts. They currently manage $10.4 trillion in assets as of March 2021 where 11 sustainable funds make up their whole ESG investing sector. Asher Anolic, the primary fund manager of FSLEX, currently manages other Fidelity sustainable funds like the Fidelity Climate Action Fund. However, he has no previous specialized experience managing ESG investing. Kevin Walenta is another portfolio manager of the Fidelity Environment and Alternative Energy Fund who currently manages other funds not centered specifically around ESG investing. Walenta does have previous experience in equity research for energy and industrial fields though.
While Fidelity is actively trying to incorporate sustainability through the creation of their ESG funds, there should be more involvement of people who have dedicated commitments and interests in the environmental field in order to ensure that this sustainable fund is managed by those who have a full scope of knowledge pertaining to energy-specific sectors.