At the 2026 Sustainable Global Leaders Conference, Wang Fang, Global Head of Investment Stewardship at Fidelity International, said that sustainable development factors are already influencing every aspect of investment portfolios, including what can be invested in, what cannot, as well as portfolio risk exposures and performance across different market environments. She noted that the real question is not whether these factors affect portfolios, but how we can proactively identify and manage those effects.
From Greenest to Best Fit, Sustainable Investing Must Balance Three Dimensions
The head of Fidelity International's investment stewardship practice pointed out that building a sustainable investment portfolio requires balancing three dimensions at the same time: first, financial outcomes, including risk and return; second, sustainable development outcomes, including risk management, achieving targets, and exerting influence through active ownership; and third, client needs, including investment horizon, liquidity, and investment objectives. She stressed that these three dimensions cannot be viewed in isolation. A portfolio with a high ESG score may carry higher concentration, while a seemingly diversified portfolio may be inconsistent with a client's sustainable objectives. Therefore, portfolio construction is not about maximizing a single metric, but about making objectives, risks, and trade-offs clearly visible and actively managed.
Indices Are Not Neutral, Holding More Does Not Mean Diversification, Four Overlooked Truths About Portfolio Construction
Regarding sustainable portfolio construction, Wang Fang highlighted four issues that deserve special attention. First, using an index as a starting point is not the same as starting from a neutral portfolio. She said that in practice, broad-based indices are often treated as a naturally neutral starting point, and sustainable investing is understood as adjustments made on top of that basis, but indices are not entirely neutral. Market capitalization reflects the current market structure and gives larger companies higher weightings, so even if a portfolio holds thousands of securities, its performance may still depend on a small number of companies, industries, and macroeconomic factors. At the same time, indices themselves also contain risks brought by energy transition, policy, technology, and changes in demand. She said that staying close to or embracing an index is also an active investment choice, and what we really need to think about is not neutrality versus active management, but which risk profile better aligns with clients' sustainable development objectives.
Second, how to achieve portfolio diversification. Wang Fang pointed out that when discussing diversification, people often think of increasing the number of holdings, but in reality there are two challenges: concentration and asset correlation. She gave an example, saying that the S&P 500 appears diversified but is in fact highly concentrated in the Magnificent Seven, yet it is still not the world's most concentrated market. In 2025, just two companies in the South Korean market contributed nearly half of the index's gains. Even more counterintuitive is that more and more industries and themes are driven by the same factors. For example, clean energy and artificial intelligence-related sectors used to be negatively correlated, but now the correlation between the two has exceeded 80%. She said that a larger number of holdings does not equal better risk diversification, and we need to focus on whether the sources of risk and return drivers are sufficiently diversified.
Third, every sustainable investing tool changes portfolio risk. Wang Fang said that negative screening narrows the investable universe, ESG score tilts increase reliance on rating systems, climate target alignment leads to index deviation, and thematic investing creates concentrated risk exposures. Moreover, even when using the same ESG tool, different methodologies can produce different results. Taking the evaluation of oil companies as an example, she said that if industry-relative ratings are used, what is seen is a ranking relative to peers; if absolute standards are used, what is seen is whether the company meets a unified sustainable development standard. Both approaches are reasonable, but they lead to different industry allocations. She emphasized that these methods themselves have no absolute advantages or disadvantages. The key is to be clear about which risks we are taking on to achieve a specific objective and where we are allocating our risk budget.
Fourth, a greener portfolio metric does not necessarily mean simultaneous improvement in the real world. Wang Fang said that selling a high-carbon company causes the portfolio's carbon footprint to fall immediately, but the company is still operating and its factories are still emitting. What changes is only the shareholder register. She noted that there is no natural causal relationship among the financial impact of sustainability risks on the portfolio, the sustainability characteristics the portfolio presents, and actual changes in the real world. She pointed out that portfolio metrics answer the question of what we hold, while impact pathways answer the question of what kind of change our investment activities hope to drive. Managing financial risk, improving portfolio characteristics, and driving real-world change require different tools.
Greener Metrics Do Not Equal Real-World Improvement, A Three-Step Approach of Broad Diversification and Prudent Concentration
Returning to investment practice, Wang Fang summarized the implementation approach as broad diversification with prudent concentration, achieved through three steps: first, core allocations should balance diversification, liquidity, and basic sustainable development requirements; second, for areas with a clear investment logic and transition pathway, different risk budgets should be allocated to pursue more focused opportunities, such as transition, infrastructure, climate solutions, or natural capital investments; third, stewardship should run through the entire investment process. Whether in core allocations or thematic investments, corporate engagement, shareholder voting, and coordinated action with investors can all be used to push companies to improve governance and address transition challenges. She said that many systemic problems cannot be solved through portfolio allocation alone and require continuous stewardship to drive change. The most important principle is that investment must start from objectives, rather than first selecting attractive sustainability metrics and then making the entire portfolio fit them.
Investment Is Not About Eliminating Trade-Offs, But Making Them Visible, Five Essential Questions for Sustainable Investing
Wang Fang concluded that any sustainable investment decision will change the risk and return characteristics of a portfolio. If sustainable development objectives do not have a clear risk budget, that does not mean those risks do not exist, only that they are more easily overlooked. For every investment decision, five questions need to be answered: What is the objective? What is the tool? What risks will it bring? How will the results be evaluated? And how will adjustments be made if results fall short of expectations? Adjustments include deepening engagement, changing holdings, revising objectives, or exiting the investment when necessary. She said that ultimately what must be answered is which risks we are willing to bear to achieve our objectives and how we will manage those risks. Investing is a process of continuous weighing and trade-offs, and our goal is not to eliminate trade-offs, but to make them more transparent, more quantifiable, and more manageable.
Taking climate investment as an example, she pointed out that some clients want to reduce portfolio carbon emissions, some focus on Paris Agreement alignment and climate risk management, and others want to increase allocations to climate solution-related assets. Therefore, a modular and decomposable toolkit is needed, including screening strategies, carbon target management, climate risk analysis, and stewardship tools. She said the most important principle is that investment must start from objectives, rather than first choosing attractive sustainability metrics and then making the entire portfolio fit them.
On stewardship practices, Wang Fang gave the example of a Chinese chemical company. She said that in recent years, Fidelity portfolio managers had maintained ongoing engagement with the company. The company already had a relatively good foundation in green development, but the real challenge was how to turn that advantage into long-term competitiveness. Around governance, emissions reduction, supply chains, and information disclosure, Fidelity continued to communicate and pushed for relevant requirements to be integrated into the company's operations. During the process, the company adopted multiple recommendations, raised targets, improved disclosure, and incorporated implementation plans, while also making progress in external ESG ratings and client recognition. She said that for Fidelity, a rating upgrade is only a process, not the end goal. What matters more is whether the company has built long-term operating capability. Capital allocation determines what we invest in, while stewardship determines what we can still do after we hold it.
Finally, Wang Fang summarized her views in four sentences: first, the starting point of a portfolio is not neutral; second, sustainable investing changes risk allocation rather than eliminating risk; third, investment tools should serve investment objectives; and fourth, stewardship is an important bridge connecting capital markets and the real economy. She said that ultimately what we pursue is not the greenest portfolio, but the portfolio that best aligns with clients' investment objectives and can continuously create long-term value for them. It should both achieve financial goals and manage the risks and opportunities brought by sustainable development, while supporting high-quality development of the real economy. A MACD golden cross signal has formed, and these stocks are rising well.
Comments