INVESTMENTS
THE LINK BETWEEN ESG AND DIVIDEND GROWTH
Matthew Jennings Investment Director Fidelity International
Fidelity International recently analysed the relationship between sustainability and dividend payments to shareholders , and found that ESG leaders are more likely to deliver sustainable dividend growth .
Factors such as a company ’ s competitive position and end markets matter for dividend growth . But a sustainable operating model and a forward-thinking management team are also important . Analysis of Fidelity ’ s sustainability ratings ( which grade around 4,900 companies ) shows a strong relationship between historical dividend growth and ESG quality . On average , companies rated A ( best ) for sustainability have the highest levels of historical dividend growth , at over 5 %, with D- and E-rated stocks offering the lowest average levels of growth . The trend is not entirely linear because the smaller sample for E-rated stocks allows for individual companies to skew the median more than in other ratings groups .
Median 5-year dividend per share growth
6 %
5 %
4 %
3 %
2 %
For example , oil majors Shell and BP both significantly reduced dividend distributions last year to fund the transition to lower carbon assets . Other energy companies may follow suit in the face of growing calls to increase investment in renewables . By contrast , utilities with renewable energy operations are benefiting from regulatory and investment tailwinds . Enel , one of the earliest utilities to invest heavily in renewable energy and now the largest renewable provider in the world by power output , has committed to 7 % annual growth in dividends through to 2023 . In a completely different sector , Unilever – another business Fidelity rates highly for sustainability – has a strong record of long-term dividend growth ( around 6 % annualised over 20 years ).
ESG leaders can offer attractive dividend yields Given their superior dividend growth prospects , one might expect stocks rated highly for sustainability to trade at significantly lower dividend yields . Encouragingly for income investors , this does not seem to be the case . The difference in yield between the highest and lowest ESGrated stocks is modest , and certainly manageable within the context of a broad global equity universe . Some ESG leaders even offer yields matching or exceeding those of lower-rated stocks . ESG investors tend to be wary of stocks where yields are high due to low valuations that reflect unsustainable business models . Pay-out levels from such companies are unlikely to be maintained . Tobacco , for example , is a high-yielding sector where concerns around health impacts and regulation feed into uncertainty around dividend security and growth potential . High-quality ESG businesses , however , should be able to maintain dividends at more sustainable levels and , as our research shows , offer better potential dividend growth over time . Tilting portfolios towards such firms can help maintain the purchasing power of equity income portfolios , which could prove useful if inflation remains elevated as economies reopen .
1 %
0 %
A |
B |
C |
D |
E |
|
|
Fidelity Sustainability Rating |
|
|
Source : Fidelity International , data as at 31 May 2021 . The Fidelity Sustainability Ratings were launched in June 2019 . As at 31 March 2021 , they cover a universe of approximately 4,900 issuers of equity and fixed income . For illustrative purposes only .
Why is there such a clear relationship ? Good management of environmental and social risks ( and opportunities ) tends to help companies avoid higher regulatory costs , litigation , brand erosion and stranded assets . Strong governance , meanwhile , reduces the risks associated with over-leveraged balance sheets or risky , value-destroying M & A . This protects profits and allows them to be paid out to shareholders as dividends .
Sector sustainability has an impact However , companies in sectors with structural sustainability issues – whether well managed or not – may face weaker dividend growth .
Important information
This information is for investment professionals only and should not be relied upon by private investors . Past performance is not a reliable indicator of future returns . The value of investments can go down as well as up and clients may get back less than they invest . Investors should note that the views expressed may no longer be current and may have already been acted upon . Changes in currency exchange rates may affect the value of investments in overseas markets . A focus on securities of companies which maintain strong environmental , social and governance ( ESG ) credentials may result in a return that at times compares unfavourably to the broader market . No representation nor warranty is made with respect to the fairness , accuracy or completeness of such credentials . The status of a security ’ s ESG credentials can change over time . Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only . Issued by Financial Administration Services Limited and FIL Pensions Management , authorised and regulated by the Financial Conduct Authority . Fidelity , Fidelity International , the Fidelity International logo and F symbol are trademarks of FIL Limited .
# 03 | AUTUMN 2021 | 35