ESG themes for 2022

For investors focused on sustainability, 2021 was a year dominated by the runup to and takeaways from November’s COP26 climate change negotiations in Glasgow, Scotland.

But the true test is just beginning now: What actions will countries take to deliver on their pledges, not only in terms of emission cuts but in preserving our biological diversity and ensuring a fair and equitable transition to a low carbon world? As we head into 2022, we see three big themes coming into greater focus: deforestation, the just transition, and double materiality.

Andrew Mellor:

Good afternoon and welcome to our first Fidelity webinar for 2022. I'm Andrew Mellor and I'll be your host for today. Now for investors focused on sustainability, 2021 was a year dominated by the run up to the COP26 climate negotiations in Glasgow. But now we need to understand the actions that countries are taking to deliver on their pledges, to reduce emissions, to preserve biological diversity and to ensure a fair and equitable transition to a low carbon world. Here at Fidelity, we see three big themes coming into greater focus this year and beyond, double materiality, deforestation and a just transition. But what are they and what do they mean for investors?

Andrew Mellor:

Before we dive into greater detail, please note you can submit your questions throughout the session today at the Q and A session on your Zoom screen. Also, please be aware there are CPD points available and they'll be sent through to you in about 10 days from now. Now it's my great pleasure today to introduce our speakers, Jenn-Hui Tan, our global head of stewardship and sustainability at Fidelity and also Dani Jaramillo, our director of sustainable investing in Australia. Welcome and good afternoon.

Daniela Jaramillo:

Thank you, Andrew.

Jenn-Hui Tan:

Thanks, Andrew.

Andrew Mellor:

Firstly Jenn, why these three themes? And why now?

Jenn-Hui Tan:

Yeah, that's an excellent question to start us off with. I think the first thing to say is that if you look at our themes last year, a lot of them were rooted in the pandemic and the position that we all found ourselves in. A lot of our themes centred around the work that we were doing around stranded seafarers, around global vaccine equity, around the impact of the pandemic on disproportionately on communities like minorities and women and these themes are of course still very valid and our work continues on them. But this year we wanted to shift focus a little bit. We wanted to kind of have our themes reflect what we all hope is going to be a post pandemic world and also to focus on what happens now? What happens next?

Jenn-Hui Tan:

Because I think it also reflects in a way the growing maturity of the ESG world. I think the last two years have shown us the why on ESG very comprehensively. And I really think there's not many investors now that question the need to integrate ESG in some shape or form. Now our attention to turn to the how. What actually do we need to do to make these concepts much more tangible and real? And how do we need to move forward our investment process? And so that's really why we've chosen these three themes because they focus on how are we going integrate in this in a more holistic way.

Andrew Mellor:

Okay. Thank you, Jenn. Let's start with double materiality. It's not necessarily a term that everyone is familiar with. Dani, what is double materiality? And why should investors now be thinking about it?

Daniela Jaramillo:

Thank you, Andrew. And I have to say double materiality is one of those that while it's relatively new in the Australian market, it's a concept that has existed for a while. And it's almost one of those concepts I think whose time has finally come because it's a framework that helps investors as they evolved in their way of thinking. As Jenn mentioned, the way investors integrate ESG is evolving and it's becoming more sophisticated and this framework really helps us do that.

Daniela Jaramillo:

What is it? If we're thinking of financial materiality as the single materiality, so what are those issues and risks that will impact companies let's say the short and medium term? That's normally what investors would ask companies to disclose, report and talk to us about so that we can assess them. When you add the concept of the double materiality, you're actually asking companies to disclose how they impact the world. How do their actions and their businesses impact the environment and society? It's a little bit of a shift in the mindset of how you think of companies. And perhaps it might be helpful if I use an example.

Daniela Jaramillo:

Let's think of an Australian supermarket, could be a Woolworths, a Kiehl's, just a hypothetical example. They would normally be disclosing to investors things like who are their employees? Ensuring that all their employees are employed under legal conditions, that they have great conditions. They might even be investing a lot in their wellbeing because they see them as an opportunity and as a point of their assets. This is normally things that we would see under this kind of more financial materiality type of thinking. It is a social risk but it is something that we can easily see that it has impact on the company in the shorter term.

Daniela Jaramillo:

However, for example, things like the company's supply chain and let's think about specifically of one of the suppliers of the hundreds of suppliers that this supermarket might have. If one of the suppliers let's say overseas might be employing people under slavery conditions, this is something that the supermarkets might not necessarily disclose because it's only one of their hundreds of suppliers. They could easily replace it if the business goes but and probably they don't know about it. When we add a double materiality lens to this way of thinking, businesses are forced to think, how am I enabling? Not a only what's material to my financials and the short and in the medium term but how I enabling those negative impacts on society? Some economists like to call them externalities. And so this is as you can see a little bit of a shift in how we think.

Daniela Jaramillo:

What's interesting is that you fast forward to 2018 and you see the Australian government and we've seen other governments globally set the Modern Slavery Act where you're actually asking companies to disclose on this. And we're seeing overseas regulation getting a lot more tighter and really having financial impacts on companies that have not only in their employees but also in their supply chains, the modern slavery practises. This is an example that shows us why modern slavery is important but I would say I would summarise why is this point for investors in three key points.

Daniela Jaramillo:

The first one is the one I'm talking about right now with the example of modern slavery. It gives us a little bit of a window into the future. It allows us to see risks that while not might be material now, they might be material in the medium and in the short term. And so it allows to be a bit more forward thinking about how we think of the ESG risks.

Daniela Jaramillo:

The second one refers more to what we're calling system based risk. All these externalities go into the system and might not necessarily be impacting the company but we have to remember that investors are rarely invested in one company, one sector or one geography. In fact, most of the large pension funds are invested across multiple geographies, industries, markets, that's the point of diversification. But by being what some of us call universal owners or universal investors, we're exposed to the whole economy and that involves system based risks like climate change, social inequality and that's risk that very hard to diversify from. When we're asking companies to think about that, we are kind of thinking of investors being this more owners across the system.

Daniela Jaramillo:

And then finally, perhaps a less pragmatic way, but still I think important way of thinking about the importance of double materiality is that ultimately investors, the ultimate pension holders, they are people that will retire in a world and there might be a bit of less of an attractiveness of retiring if you can't retire in the original area where you want to retire because of bush fires or if your grandchildren that are millennials or Gen Z are not able to get the meaningful employment they want because of social inequality. That's a bit of a more pragmatic one but those are I think the three key reasons why investors need to start thinking of the value of double materiality as a framework.

Andrew Mellor:

Thank you, Dani. Very helpful. And Jenn for you, how can investors include double materiality in their assessment of companies? And how at Fidelity do we approach this issue as part of our fundamental research and into our ESG ratings?

Jenn-Hui Tan:

Yeah. Thanks, Andrew. A couple of years ago, Fidelity introduced its own proprietary sustainability ratings. And our core differentiation was that we embedded this within our fundamental research process which is to say that our sustainability research is performed by our fundamental research analysts, the same people that are providing recommendations on whether or not to buy or sell or hold all of our investing companies because we think they are the closest to the companies and the ones best able to make those forward looking assessments. But our framework was very much rooted in financial materiality. In other words, what are the ESG risks to the companies that we own? And how are the companies that we own managing those risks?

Jenn-Hui Tan:

And that is still very important and still very valid but it is a narrow way of looking at ESG risks because as Dani said very correctly, there are a lot of impacts that companies have on the environment and society that may not be immediately reflected in share price or in revenue but have huge implications on the environment or on society. And so we did a comprehensive review of our methodology and we looked at what are the kinds of issues we need to be integrating to take that medium and longterm view that Dani talked about. And so we came up with a new rating system, which we have imaginatively called Version 2 and we're in the process of deploying Version 2 right now.

Jenn-Hui Tan:

And Version 2 will focus the analysis of our fundamental analysts on how companies manage the ENS impacts of their activities, either directly in their own businesses, indirectly through their supply chains or through the impact of their product or service itself at the point of use, ie. as how it is consumed by either a business or by a consumer, such as ourselves. We've also launched a new set of climate ratings and these climate ratings are intended to assess the genuine alignment and the transition of our investee companies to the goals of the Paris agreement. Because our belief is that regardless of where a company operates or the regulations or the markets which are upon it, all companies are expected to contribute a fair share towards the global reduction efforts that we now see and we want to be assessing and encouraging companies to contribute their fair share to emissions reductions and therefore we want to use our ratings as a way of measuring their progress but then incentivizing them to improve and thereby going up our rating scheme, allowing us to own them in greater and greater size.

Andrew Mellor:

Thank you, Jenn. Just one final question on double materiality that I'll ask to you, Dani. You mentioned it's a relatively newer concept in the Australian market but is this concept being discussed by our global colleagues in Europe, for example or other parts of the world, particularly?

Daniela Jaramillo:

Yeah. The concept, it's not new and but it kind of came back to, let's say the ESG world when EU included into its regulation earlier, I think it was last year. But slowly I can see people are starting to talk a little bit more here in Australia and I expect that it's going to continue to be adopted in the coming years.

Andrew Mellor:

Excellent.

Jenn-Hui Tan:

Can I just add as well, Andrew that I think as investors, our analysis of these impacts is going to be helped very significantly by these regulations. Where we see these new ESG disclosure regulations coming up, regulators like the EU are now requiring companies to report on how they're sustainability issues impact on business or people. And so that is going to be additional data points that we can integrate into our framework, which then informs our assessment of a company's sustainability characteristics.

Andrew Mellor:

Excellent. Thank you, Jenn. Let's move on to our second theme for today, deforestation. I'm sure the audience is very familiar with deforestation but let's tackle, I guess, the problem itself, Jenn, and how it's related to climate change and why it is such a big issue.

Jenn-Hui Tan:

Deforestation, we think is a critical issue for us going out to 2025. And that's why we've chosen it as a theme for this year because our work needs to start now. In a way, what deforestation represents is the intersection of two huge risks that we face as a planet, one being climate change and the other being the loss of biological diversity in our system. Forests are natural carbon sinks. They absorb about one third of all of the carbon released by the burning of our fossil of fuels each year and therefore they play a very critical role in climate change mitigation. But at the same time, they're crucial for biodiversity. Although they cover less than 10% of the Earth's surface, they contain more than 90% of our species. They're home to 21% of the world's population and 80% of the world's plant and animals.

Jenn-Hui Tan:

If we can see what's happened over time since 1990, the world has lost 420 million hectares of forest, mostly in South America and in Africa. And about 17% of the Amazonian rainforest has been destroyed in the past 50 years. And these losses have actually been rising, not falling. More recently what we've seen is a loss in the tropics of 12.2 million hectares of tree cover. This accounts for something like 4.2 million hectares of the tropical primary rainforests, which are the most important carbon sinks, which is roughly the size of the Netherlands lost just this decade. From the start of 2020 onwards and this in turn equates to a loss in the ability to absorb carbon equivalent to 517 million cars or two times the number of cars in the United States alone. And so that kind of illustrates really what we are destroying and how quickly that problem is accelerating not decelerating.

Andrew Mellor:

Okay. You mentioned some of the areas that deforestation is occurring. We know this is impacting some of the emerging economies, particularly places like Brazil, Indonesia, Malaysia, but how does this impact on large listed companies that investors may be exposed to? And which sectors particularly are likely to be impacted?

Jenn-Hui Tan:

Sorry, is that question to me or to Dani?

Andrew Mellor:

That's for you, Jenn.

Jenn-Hui Tan:

I think, so large scale deforestation is happening in a lot of these emerging countries because of weaker legislation, weaker protection for these things and also weaker enforcement and that in turn heightens investment risks for universal owners and investors like us because it increases physical risks through reduced soil fertility, through loss of our biological diversity but also transition risk because it reduces market access, it increases policy risks and increases reputational risks as well. The key sectors that we see impacted almost directly are those around the soft commodities. I'm thinking about soy, I'm thinking about palm oil, I'm thinking about beef, I'm thinking about timber.

Jenn-Hui Tan:

But beyond that, we think about those impacts beyond just those primary sectors into all of those sectors that are tented on those commodities within their value chain. Broadly speaking, we're looking at materials, we're looking at consumer and we're looking at energy as well. And all of these companies are exposed to this risk of deforestation through, as Dani said earlier, the lens of double materiality, which is why we're focusing our attention, not just on the producers of these commodities, some of which are listed and we do own, particularly in the palm oil space but also more broadly downstream as well. Looking at food producers, looking at animal protein manufacturers, looking at retailers.

Andrew Mellor:

Okay. Thank you, Jenn. Let's think locally now, Dani, please. What companies are most exposed to these risks within Australia?

Daniela Jaramillo:

I'll start by saying a little bit about deforestation in Australia. Australia, because of regulation, it's not highly exposed to deforestation itself. Most of deforestation in Australia happens because of fires, wildfires and a little bit because of forestry but those are not considered to be the, let's say the most dangerous reasons for deforestation because it's not a permanent loss of the forest. From that perspective, the industries that end up being most exposed are for example, the insurers, the real estate and infrastructure companies.

Daniela Jaramillo:

But thinking a bit more broadly about those indirect risks. And this Jenn mentioned, is that if we think about that concept of that 90% of biodiversity is in 10% of tropical forest, it really gives us a sense of how much we need to protect them. And so a lot of the sourcing that our Australian companies will be using will depend on that. But just to provide a specific example, multivitamin company like Blackmores has a huge focus on biodiversity, even though they are not the ones causing the deforestation, a lot of their operations for example, are based in Thailand and these are areas where they really depend on that biodiversity to be able to source the materials for their vitamins. That's just a little bit of one example of how indirectly biodiversity and deforestation are linked and also why is it so important for us as investors, to not thinking only about one company but think more broadly of all of our investments and how can we help address the systemic risks.

Andrew Mellor:

Thanks, Dani. I'll switch back to you now, Jenn, for our next question. What are large investors doing about these risks around deforestation? And second part of the question, how important is engagement with corporates on those issues?

Jenn-Hui Tan:

I think there's been a lot of work being done by investors around this topic. And some of this actually is also driven by regulation. We're seeing new, so for example in France, the now famous Article 25 is going to be requiring investors to report on forest risks within our portfolios by the middle of this year. And so we're developing new tools, new ways to measure this kind of forest risk, which then extends further out into biodiversity loss and biodiversity risk in the future. There is without a doubt that this is an emerging topic of focus, both for regulators and for investors. We also saw this at COP26 in Glasgow, where more than a 120 countries came together, countries representing 85% of global forests, agreed to come together to stop deforestation and reverse land degradation by 2030. And as part of that, we joined a group of financial institutions, 30 of us in total that signed a pledge to eliminate agricultural commodity based deforestation risks from our investment portfolios by 2025.

Jenn-Hui Tan:

How are we going to do this? This is the work that we're doing today and is one of the reasons why this is one of our key themes. We start by assessing the risks around the companies that we have exposure to, in the way that we talked about earlier. But also we started our engagement programmes with these companies. There's three in particular that I pick out because I thought they were sort of quite interesting.

Jenn-Hui Tan:

The first is something I've already alluded to, which is a very long running one that we've had with palm oil growers, which goes back to 2018, where we're trying to encourage them to adopt more responsible palm oil growing practises, increase their traceability at the supplier level and adopt global best practise standards around palm oil production.

Jenn-Hui Tan:

And one interesting that we've done very recently is partner with a nature based solutions provider in France around something called bioacoustics technology, which sounds very fancy but really what it is is that they're trying to use sound to measure the loss of biodiversity in forests. And as a pilot, what we've done so far is place these device in a plantation, which is monoculture, ie. only growing palm oil, plant them in plantations, which have a diverse set of crops, including palm oil, and then plant them in virgin forests. And then we can assess using these tools and measure what type of biodiversity loss may or may not be occurring because of our growing practises. And that in turn allows us to inform our future engagements with companies and what kind of direction we think companies need to change, the practises they need to change in order to reverse biodiversity loss and protect species.

Jenn-Hui Tan:

The second interesting engagement that we've been working on is around satellites. We've partnered with a group of investors again, and we're using a satellite provider to see where large scale deforestation is happening, tracing that to the supply chains of global multinationals that have links going back into these supply chains and then engaging with the end buyers and letting them know of the risks that we can see using this technology and asking them how they are addressing it within the way in which they address their supply chains. Both of these things I think are sort of interesting ways in which we want to be using new technology and new practises, to be able to inform our engagements with companies.

Andrew Mellor:

Thank you, Jenn. And just out of interest, I guess, for our clients, are these engagements with corporates more likely to occur with those companies listed in emerging markets? Or are you also referring to firms that are developed market companies with assets in emerging markets?

Jenn-Hui Tan:

The answer is both. On the palm oil side, it typically refers to the emerging markets companies because that's where a lot of these companies are occurred and obviously where the plantations are based. But on other engagements, we focus on developed market companies because those are the ultimate end buyers of all of these products in one way, shape or form. All of those things that are produced in the emerging markets find their way into developed markets, supermarkets and food and restaurant and so on and so forth. And so we want to make sure that we're tackling both on the supply side but also on the demand side.

Andrew Mellor:

That's great. Thank you, Jenn. I think we'll leave deforestation there. That was very helpful. Very useful. Thank you. Let's move on our third theme for today, a just transition. Jenn, let's start with you. What do you mean when you say a just transition to a low carbon economy?

Jenn-Hui Tan:

Yeah. Again, I think this is a topic that isn't that well known but one that we think is going to become very important, especially now when we see a lot of the sort of short term events going around, around cost of energy, around the cost of living and inflation riding through our system. Really I think we're all familiar with what the transition is, the need to pivot all of our businesses, all of our companies to a low carbon future. The just transition refers to how are we going to do this in a way that is fair to society, to the workers and the community that are dependent on those fossil fuel industries but also to countries that are dependent on carbon intensive sources of energy in order to power their development?

Jenn-Hui Tan:

And so it refers to both of these things in our view, the societal tensions that are arising as a result of this need for transition. And part of this, as I alluded to earlier, can be seen in the rise in energy prices around the world but also in the tension that was very evident that COP26, between developed countries that have developed, let's be honest, largely because of the reliance on and burning of fossil fuels over the last few decades and developing countries that have an equal right to develop and to improve their standard of living but need to do so now in a way that that does not contribute to the global problem that we see around climate change.

Jenn-Hui Tan:

And so our just transition is focused on essentially both of these impacts. What we need to do is to find a way to balance these two things clearly and have, I think, a nuanced and intelligent conversation about the role of fossil fuels going forward. We want to reduce our reliance on fossil fuels but no one, no sensible expectation is that it can go away in the near term. We don't have the technology yet that can replace that. How do we balance these two things?

Andrew Mellor:

Thanks, Jenn. And obviously a large part of that conversation is from governments and individual countries and so forth but from an investment landscape, why is this issue important for investors? What sort of impact can large investors have? And what are investors doing about this as well? And I'll put that to you Jenn.

Daniela Jaramillo:

Jenn, do you want to do that one? Yeah.

Jenn-Hui Tan:

Dani, why don't you take that one?

Andrew Mellor:

Okay, go ahead.

Daniela Jaramillo:

Yeah. And perhaps I can use a little bit the Australian context to explain what that means here. I think when we think about a just transition in the Australian context, we're mainly thinking about that tension in society because of those industries that will be impacted by the phase out of fossil fuels and Australia as a country that has been a producer of fossil fuels for a while, it is something that we visibly see. I think we need to think of that just transition, as Jenn mentioned, when we thought about this theme, it was very much about the how. And so how do we achieve Australia's goal of net zero by 2050? It is also involving and ensuring that we're bringing everyone in the journey and thinking of those workers and communities that will be impacted by this transition.

Daniela Jaramillo:

In Australia, we know that close to 50,000 people work in currently on coal mines and then it's around 1% of the overall workers in Australia work in fossil fuels. While those numbers might not seem large, we have to remember that they're also very concentrated in specific communities and can have deep societal consequences in those communities as they lose their livelihoods. It is important that both companies and local government work together in bringing and doing that transition. When we talk about a low carbon transition, I really like to refer to, we want an orderly transition and an equitable transition. That's what we need to continue with the pace and have a plan for both, from a technology perspective and from a social perspective.

Andrew Mellor:

Thank you, Dani. I guess and leading from that, our climate policy certainly favours engagement rather than exclusion. I know we're doing a lot of engagement activities over the course of this year, particularly with coal producers. What are the topic areas that you're focusing on in some of those conversations with some of the larger polluters across the industry?

Daniela Jaramillo:

Yeah. As you mentioned, we do have a big climate change engagement programme globally and in Australia. Our areas of focus are encouraging companies to set target for reducing their emissions, ensuring that those targets actually are grounded and the boards have strong governance over those targets, ensuring their credible and ensuring that they're also aligned with companies' capital expenditures and strategies. We want to see that transition as part of their business model. Those are some of the conversations that we're having. And we won't be afraid of voting against companies where we feel that the board is not necessarily managing for those risks in an appropriate way.

Daniela Jaramillo:

Along these conversations, we are talking to companies about how are they thinking of transitioning, especially where they have very concentrated groups of people? And let's think specifically of coal and closing coal facilities. We know already when those coal plants are going to close so we want to see companies thinking along the lines of what's going to happen to those communities that depend on that? And what's happening to those workers? Think there's really a great opportunity for transitioning for retraining and re-skilling some of those workers. And as we want to see those companies move to sustainable business models, so we don't just want them to shut them down. We want them to transition to sustainable business models. There is an opportunity to transform those communities in low carbon hubs. We see some of them already starting to think, how could they become that place where they create and they build batteries? And how can they re-skill their employees so that they can continue be part of the company's journey as it decarbonizes? This is the type of conversations that we're currently having in Australia.

Jenn-Hui Tan:

Andrew, if I may as well add to that. I want to to tackle a sort of implicit question that was embedded in your assumption which is, why actually should we favour engagement over exclusion anyway? Is it actually better to turn our backs on these big coal producers, make sure that our portfolios are clean, make sure that we're not accused of funding the production of these so-called dirty assets. And we thought long and hard about this question. And honestly, there isn't really an easy answer here. I think different investors have taken different perspectives on this as we've seen as well. I think our view is informed by the fact that we actually don't think exclusion is that successful. We don't think it works. We don't think it takes away the problem of those emissions.

Jenn-Hui Tan:

We think actually what happens is that what we're doing is pushing these assets into less and less transparent parts of the capital markets. Ones that don't have the kind of scrutiny that institutional investors like Fidelity are subject to. Let me give you a sort of an interesting stat that I read. Since the start of 2018, the six big oil majors in the West have divested approximately $44 billion of fossil fuel assets and they've done so primarily because it is increasingly difficult to be the owners of these assets. But at the same time, private equity funds have spent $60 billion on the acquisition of these brown assets. A lot of these assets are what the oil industry calls midstream. They refer to things like pipelines. They refer to things like storage facilities. They refer to infrastructure.

Jenn-Hui Tan:

These are enormously profitable investments because they're generally guaranteed by a longterm contract, by the end user of that kind of infrastructure. We don't want to see that happening. We don't want to see investment returns that our fund holders should be enjoying, go into private hands. And we also don't want to delegate the responsibility for transition of those assets, of the infrastructure associated with those assets to other players as well. And so, as uncomfortable as it is for us and I think for some other investors, we think the right thing to do is to remain holders of these companies but to use our influence in the way that Dani has talked about to encourage them to be more responsible about how they divest and the consequences on the communities, societies when they do divest.

Daniela Jaramillo:

I might just add another point on that. That I think we are seeing a shift. It's one of the tricky things within engagement is that it's sometimes hard to see the outcomes in the shortage and with the divestment you clearly see it. It was in the portfolio, is no longer in the portfolio. With engagement, it's not such an easy answer. But I do want to point out to something that we saw recently I think two weeks ago, we saw Exxon Mobile actually setting net zero targets. If you look at the backup where that came from, it was actually an activist hedge fund that decided that it wanted to take a position in the company and put directors in the board to ensure that those directors were managing for climate change risk appropriately and setting those targets.

Daniela Jaramillo:

Interestingly, if they would have divested and if institutional investors would have divested, like Fidelity would have divested from that, they would not have received the votes. They would never had that seat at the table to actually say, "Yeah, we actually do support this shift in the company." I think that's a clear example of how engagement can work. And we are seeing those larger players that will continue to exist and that will continue to play a role and we just need to make sure that they are shifting so that they are aligned with the objectives of Paris.

Andrew Mellor:

Yeah, that's a great example. Thank you, Dani. And I've got one question from our audience that's related to this topic as well. I'll put it to you, Jenn. Would you expect for Fidelity PMs to take short positions in any of these high emitting companies where perhaps we're not seeing change but we can benefit on a financial side from their potential decline in value over time.

Jenn-Hui Tan:

Gosh. I love that question. I think it's a super interesting one. Look, I think the answer is potentially but I think we need to be a little bit careful when we think about shorting. Firstly, not all of our funds have that capability enabled to it. It's a subset of portfolios that have that kind of shorting ability. The second is that, when we think about ESG issues, we nearly always think about them as being synonymous with longterm issues and that's very implicit in the concept around double materiality because what you're basically doing is taking into account short impacts to the environment and society that don't have a short term impact. Otherwise they would be financially material but may quite likely have a longterm impact because of the feedback mechanisms from the externalities that these issues are generating.

Jenn-Hui Tan:

And as a longterm holder, you can hold over a duration that allows you to see that play out. You cannot do that as a short seller. A short seller, you are subject to a lot more different market pressures. You are reliant on catalysts occurring. A heavy polluter, yes is causing societal, environmental damage and societal damage but your question as a short seller is what is the time horizon in which that is going to play out? And what are the kind of feedback mechanisms that is going to catalyse that in terms of a loss of value in the share price that will enable you to take advantage of that dislocation?

Jenn-Hui Tan:

And that is much more unclear. You're more reliant on a black swan event happening or some kind of regulation or pricing event. I think there's a lot less clarity around how that plays out. And so for that reason, although certainly ESG issues are a key focus of our short selling team, particularly I would say on the G side where that catalyst you can see much more imminently happen, I think you want to be thinking carefully not just about the fact of the bad thing happening but also how that bad thing then manifests in the company's valuation.

Daniela Jaramillo:

I might just put this a little bit more from an ecosystem perspective. Not so much as to what would Fidelity do but I do think that interesting could be a role for green short sellers in the ecosystem. And I'm just thinking mainly from a theory of change perspective, especially if those short sellers are actually vocal about their intentions or about what they're doing. That could actually help put pressure on some of companies to act. I'm not thinking so much as the investor but I'm thinking more as from how do we change and manage for that systemic risk. And I do think that that's interesting. We'll see if that's something that ends up impacting those companies as short sellers become vocal about how they are planning of what they're planning to do.

Andrew Mellor:

Thank you, Dani. We've certainly covered some great topics today and had I think a really worthwhile conversation. Before we close, I'll just pass across to Jenn. If you have any final thoughts or any closing remarks on those three things we've discussed or anything else that our clients should be thinking about with regards to sustainable investing over 2022 and beyond.

Jenn-Hui Tan:

Yeah. I think, as you say, I think we've discussed a lot of topics. We're really keen to continue the conversation with our clients. I think we learn the most when we engage with our clients because their priorities then inform our priorities. I think what we're seeing here is the beginning of a, well I wouldn't say beginning, but certainly early innings of a very significant shift in finance. Sustainability is reorienting every part of the financial industry, not just asset managers as well, but banks, insurance companies and so on, so forth. And we're all seeing the need to rise to that challenge, rise to that demand that's set from us by society and by our end customers. And so, I think this to me feels like just the beginning of the conversation and our hope is that we'll be able to continue to come back over the years and be able to show you how we're developing on these things and the work that we're doing to be able to support our investors and our fund holders.

Andrew Mellor:

Thank you, Jenn. And any final comments from you, Dani at a local level in Australia?

Daniela Jaramillo:

Well, I think one of the things that is, I think sometimes all these themes can become overwhelming. We have three different themes this year. We have three different themes and that's just because our industry's evolving, it's changing swiftly and we as investors are also getting our heads around, what all these themes mean. We're very happy to support you and have conversations about these specific themes and how they might impact investments in the longer term. But it's an area that's quickly evolving and sometimes it can become a bit overwhelming getting your head around all of these things.

Andrew Mellor:

Well, thank you.

Jenn-Hui Tan:

Can I just?

Andrew Mellor:

Sorry, Jenn. Final word.

Jenn-Hui Tan:

Sorry, Andrew. I've just seen a couple of questions pop up on the Q and A. I don't unfortunately think we have time to cover them but I think they're both extremely interesting topics and that we'd love to be able to follow up with those clients to kind of talk about them in more detail. I think the one quick comment that I would make is that ESG is sometimes an impossibly broad field. It is now covering so many disparate topics, climate change, to the biodiversity loss, to social issues like tobacco, gambling, alcohol, all of these different things. And it covers both risks to us but also investment opportunities from society developing new ways of addressing these problems.

Jenn-Hui Tan:

This seminar has focused on these three themes but it does not mean that our focus is only these three themes. We own many, many companies and through the lens of double materiality, we focus on the impacts that these companies have in many different sectors on society and the environment. And so, we would love the opportunity to be able to come back and discuss more of our work, more of these themes in the future and to have and as I say, to be able to learn from our clients while we do that.

Andrew Mellor:

Yeah. And I'll also mention we have a great sustainability section on our website. You can also look at, for further details on a range of topics as well. But we will have to leave it there. I do thank you all for dialling in today. I thank you, Jenn. Thank you, Dani. Really appreciate your time. That's all for now and we'll look forward to some further great webinars over the course of 2022. Thank you all and good afternoon.

 

All information is current as at its published date unless otherwise stated. 

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Jenn-Hui Tan is Chief Sustainability Officer for Fidelity International.

Jenn is responsible for providing external and internal leadership for Fidelity’s sustainable investing activities, including the strategy and policies on engagement, voting and ESG integration.

Daniela joined Fidelity in August 2021. Prior to that, she was a Senior Responsible Investment Adviser at HESTA, one of Australia’s largest pension funds. While at HESTA, Daniela set up and was the Chair of the investor group of 40:40 Vision, an initiative to achieve gender balance in executive leadership. Daniela has held roles in responsible investment across the UK (Legal and General) and US (Wespath Benefits and Investments) before settling in Australia. She is a non-executive director at RIAA (Responsible Investment Association Australasia) and was a member of the PRI Stewardship Advisory Committee between 2017 and 2021.

Originally from Ecuador, her career began as one of the founding members of a not-for-profit focusing on improving education and health outcomes in the region. Daniela holds an MSc. in Environment and Development from London School of Economics and a B.A in Journalism from Universidad San Francisco de Quito.