Fidelity’s Brazil Trade Highlights ESG World’s New Conflicts

(Bloomberg) -- When shares of Brazil’s Vale SA suddenly crashed last year after a deadly dam collapse, Nick Price did what any fund manager might have done for a stock he already owned: He purchased more.

It was a profitable trade by traditional measures: The stock gained 24% in the year after the dam failed, outperforming global emerging-market benchmarks—a win for a Fidelity International fund manager with a record of beating his peers.

But the story doesn’t end there. That’s because for a growing cohort of investors, stock picking is no longer a straightforward matter of financial risk and reward. As Price was buying, a number of fund managers dedicated to promoting responsible corporate behavior and fighting climate change were dumping Vale even if that meant missing out on any stock gains.

“Responsible investing and maximizing value for shareholders don’t overlap as much as we had hoped,” said Duncan Austin, a former partner at London-based Generation Investment Management, the firm co-founded by Al Gore. “Unfortunately, when they clash, most of our business metrics and incentives still nudge investors to favor profit over planet.”

Not at the Church of England and Germany's Union Investment though. Within days of the January 2019 collapse of a tailings dam owned by Vale in Brumadinho, Brazil, which resulted in the deaths of 270 people, the Church of England Pensions Board unloaded its shares and Union, which manages 368 billion euros ($407 billion) of assets, sold its holding a few weeks later.

The Church of England also partnered with the Council of Ethics of the Swedish National Pension Funds to form the Mining and Tailings Safety Initiative and signed up firms overseeing more than $13.5 trillion to their campaign. The group is compiling a global database on tailings dams, which are earth-filled embankments used to store mining waste, to assess their construction and stability.

“We are all in process of internalizing the reality of what happened at Brumadinho,” said Adam Matthews, director of ethics for the Church of England’s pensions board and co-chair of the initiative. “There have been tailings dam collapses over many decades that resulted in loss of life, but for any company that has a Vale-style event now, it would be company-destroying event as we are also much more aware of the impact.”

Even before the dam collapse, ESG investors had plenty of reasons to steer clear of Vale; as the world’s biggest producer of iron ore, it’s by definition a large carbon emitter. Justifying a trade on ESG grounds after the event should have been harder still: the environmental (E) toll was huge—the incident unleashed 12 million cubic meters of toxic sludge; the social (S) cost was massive loss of life; and the incident highlighted governance (G) failings at Vale – this was the company’s second fatal disaster since 2015.

Just a few years ago, only a select group of money managers and funds used the label ESG, but today assets managed using a broad definition of the ESG approach exceed $30 trillion. With climate change and gender inequality becoming top social concerns, a growing list of firms from Goldman Sachs Group Inc. to BlackRock Inc. are pledging to use their resources to combat such ills.

“What worked for fund managers in the old world won’t work in a world where environmental impact is on a par with financial performance,” said Virginie Maisonneuve, Singapore-based former chief investment officer of Eastspring Investments. “ESG portfolios will become the norm over the next decade and the skills you’ll need to analyze potential investments, the kinds of data you’ll use and the way you interact with the companies you’re invested in will evolve dramatically .”

Price’s decision to add to his stake raised eyebrows among Fidelity’s own team of ESG experts, who monitor the firm’s ESG practices. Not only did they consider the trade out of step with their ideas of sustainability and good corporate behavior, it also jarred with what Price and fellow emerging markets portfolio manager Grigorios Konstantinidis had told a French pension fund client just a month before: that ESG considerations were key in their investment decisions, according to people familiar with the matter.

A spokesman for Fidelity International, which manages $448 billion of assets, said the asset manager “immediately and urgently” engaged with Vale following the dam collapse "to understand the company’s oversight, processes and operating practices” and was satisfied that the miner’s management "had been proactive and were urgently carrying out appropriate remediation measures.” 

“We take an active ownership approach and strongly believe that fostering change is the most effective and lasting way to positively influence corporate behavior,” the spokesman said. “In order to do this, we always focus on engagement rather than opting out and excluding. This will mean that we will often continue to hold, or even in some cases, increase our stakes in companies that are actively dealing with significant ESG issues and push for change.”

Price started at Fidelity in 1998 and now manages more than $9 billion across four funds. Data for the flagship $4.8 billion emerging markets fund show it held a $70 million position in Vale in April 2019, three months after the dam collapse, having not owned the stock in its year-earlier filing. The company spokesman said the fund first built a position in Vale in September 2018 before increasing its holding in the first half of 2019 and ultimately selling in September 2019. The divestment "was not due to ESG factors" and Fidelity continues to hold the stock through its Latin American Fund co-managed by Konstantinidis, the spokesman said.

Price was among Fidelity executives that held several calls with Vale officials following the deadly accident to discuss its strategy to deal with the disaster, according to one of the people familiar. 

“Asset managers can have a bigger net positive effect by holding a group of ESG basket cases and successfully engaging with management to change those companies’ ESG performance than by holding a portfolio only of the virtuous,” said Catherine Howarth, chief executive of responsible investment campaign group ShareAction. 

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