Meet Daniella Jaramillo, Sustainability Director in Australia, who has recently joined our Global ESG team. We discover the evolution of ESG, her tips for assessing sustainable funds and why double materiality matters.
What does sustainability mean to you?
I grew up in Ecuador, a country with an economy that relies deeply on natural resources like oil, but also on nature-based tourist attractions like the Galapagos islands, beaches, the Andes, and the Amazon. I learnt early on the value of nature and why we need to protect it. At the same time, I saw how the mismanagement of these resources can exacerbate social problems like inequality and corruption. Having seen this all first-hand, I decided to make sustainability and the improvement of social issues, a core part of my professional career.
How does sustainability play in your role at Fidelity and the way in which you serve clients in Australia?
A core part of my role is to ensure that our clients’ concerns are being reflected in Fidelity’s global sustainable investment strategy. In many ways, Australian clients, particularly asset owners, are very progressive in their approach to sustainability. They are increasingly focusing on investors’ role at the ‘system level’, this means understanding not only how Environmental, Social and Corporate Governance (ESG) issues create risks and opportunities for an individual company, but also how can we positively generate impacts in ‘the real world’ through our asset allocation and company engagement activities. For example, the Australian approach to Modern Slavery, is a global best practice that help us avoid and minimise the existence of modern slavery globally.
What excites you most about your sustainability role at Fidelity?
I have always been attracted to finding creative ways to solve complex problems. Sustainability and social problems are normally complex problems that are systemic and often global in nature.
This means that even problems that might appear local, require first, global solutions and second lots of collaboration. Working for a global firm like Fidelity, with a well-resourced Sustainable Investing team of nearly 30 people, and with access to information and specialist equity analysts covering companies around the world, gives someone in my position the perfect sandbox to help find solutions.
For example, we are currently working in a couple of projects in which we are facilitating collaboration between companies to help address environmental and social problems within their value chains and within their industries. We do this through strong collaboration with analysts in Australia and London, as well as Portfolio Managers.
It’s really exciting for me to have the ability to innovate how we think of ESG, moving the focus of the ‘sustainable investing industry’ from a process, input, and risk based approach, to one that achieves real world, system-level outcomes.
There has been an overwhelming focus on ESG investing in the past two years and proliferation of products to market. How can investors spot greenwashing and choose fund managers that align to their ESG objectives?
The jury is still out when it comes to defining greenwashing, and there are multiple ways of looking at it, so perhaps it’s helpful if we talk in terms of ‘being true to label’ and ‘achieving real world impact’, which is where I personally think investors should focus on.
Assessing if a fund is true to label is not easy, because there are multiple ways in which sustainability claims can be implemented, and therefore attention to nuance and transparency in fund’s documents and PDS is key. For example, a fund that has a fossil fuel exclusion, might still have exposure to coal reserves that are held under a holding company structure, and that is not captured by revenue of the company in question. It all depends how you are defining a fossil fuel company. Luckily there are now certifications in Australia that can give investors some confidence about this such as ‘Tobacco free portfolios’ and RIAA’s Certification program.
If an investor wants to invest in a way in which helps address some of the world’s environmental and social problems, my advice would be to focus less on the investment product and more on the investment manager. It’s a lot easier to deliver products that are true to label, but to have a sustainable investment program with the level of influence to encourage positive change in companies is more difficult.
I would check if the manager has devoted the resourcing for ‘engagement or stewardship’, is it proportional to its size? is their disclosure of engagement examples meaningful and proportional to its size? is the manager comfortable being public about its position regarding sustainability issues, does the manager conduct public policy advocacy or market level initiatives to seek change? These are some of the questions I would be asking.
You’ve been in the industry now for a decade, how have you seen the industry evolve and can you provide us with a few specific examples for this?
I started my career in ESG in London 2011, so one of the most important financial markets and arguable one of the most sophisticated. Being an ESG analyst then was very different, as we were almost perceived as environmental activists or ‘tree-huggers’. It was challenging for many asset managers to justify the headcount for ESG resources beyond proxy voting or governance. In terms of investee companies, the most sophisticated sustainability reports were mainly from large companies in the resources sector, and discussions of climate change were very limited to those companies. While we discussed reductions of GHG emissions, the thought of Exxon committing to net zero (as it announced earlier this year) was unthinkable.
When I moved to the US and worked for an asset owner in 2014 things were not that different, even as the regulator changed the rules to allow for ‘non- financial’ issues to be considered in investment decisions. On reflection, the consideration of environmental and social factors as ‘non- financial’ tells a story about how the industry perceived ESG.
Asset owners talked about being ‘universal owners’ (which can be defined as being exposed to a slice of the global economy) and needing to manage for systemic risks such as climate change, social inequalities, resource scarcity, etc. However, many still had externally managed portfolios with asset managers that were (at best) focused on managing ESG risks for companies within their own thirty or so company portfolios. It was hard for asset owners to ‘operationalise’ with limited engagement resources -this meant relying on manager’s company engagement rather than thinking of system-based risks as we do now.
When I moved to Australia in 2016 to work for HESTA, one of the earliest adopters and leading Super Funds in ESG, it was very refreshing. HESTA’s responsible investment approach focused on the idea that in order to care for members’ financial futures, you need to not only deliver strong returns but also ensure that those investments are not at odds with a healthy environment and society where those members would be retiring in.
Investors are calling this the ‘double materiality’ approach. You’re not just thinking of what is financially material in the short term, but you add a second lens to consider companies externalities and how they impact the world. The rationale is that, while some negative impacts might appear non-material in the short term, they will eventually become material and impact valuations. They’ll become material because of regulation, or because they don’t meet societal expectations, making it difficult for companies to hire/retain employees or get customers, partners, or have the support of communities.
The other powerful piece of this approach is that if you engage with companies with a double materiality lens, you aim to limit their negative externalities into society and environment, which will help address some of the SDGs (Sustainable Development Goals) and reduce systemic/beta risk, which reduces overall risk and good for long term returns.
When I transitioned from HESTA to Fidelity, I was looking for an investment manager that understood this shift to thinking of companies impact in environment and society. I was very excited to see Fidelity’s ESG ratings, which include a double materiality lens.
Finally, in your view, what do you think is the most important skill for an ESG professional in the finance industry to add the most value in their role?
Traditionally, the focus has been on subject matter expertise, which is important. Everything we do in sustainability has to come from knowledge and be backed up by science. However, I learnt early in my career that there is no point having knowledge and expertise if you can’t apply it effectively to practice.
ESG professionals in the investment industry need to be able to understand change and innovation, how it happens, what are the main barriers, and how can we help facilitate this. So, skills like influencing, negotiating and empathy become very important. We are also ‘translators’ as we need to be able to translate issues from environmental and social sciences into investment language, to have an impact and assist investment professionals/colleagues with their integration.
Finally, while there are professionals that choose to become experts in one issue i.e. climate, I think in we all need to be generalists at heart and be passionate about learning. Most issues relating to sustainability are interrelated between each other, and these are constantly evolving, therefore, you need to make learning part of your every day life.
