Expert: Daniela Jaramillo – Avoiding greenwashing as investors | Fidelity

Bryce: [00:00:16] Welcome back to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. Now, if you're just joining us for the very first time, a big welcome. If you're just getting up to speed with the basics, head across to our Get Started Investing podcast. But otherwise, let's jump straight in. My name is Bryce, and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:00:40] I'm very good, Bryce very excited for this episode. We are talking about ESG investing, but in particular grain washing. Now, as consumers, I think we're all familiar with this idea of greenwashing where a brand tries to put a bit of mayo on their sustainability credentials. But as investors, it's something that's become more and more, I guess, front of mind over the past 12, 18 months. That's right. And we've got one of Australia's foremost experts on greenwashing and not not on doing greenwashing, but on spotting and fighting greenwashing. To help us understand it better. 

Bryce: [00:01:17] That's right. We sat down with Head of Sustainable Investing from Fidelity Australia, Danielle Tamayo. She takes us through the definition of greenwashing but also green hushing. 

Alec: [00:01:29] We hadn't heard before. I think the world has gone from green. Wishing to greenwashing. To greenwashing. Yes. 

Bryce: [00:01:35] Green slashing, isn't it? 

Alec: [00:01:36] You did in the interview, you tried to think. Exactly. I kind of wish you hadn't suggested. 

Bryce: [00:01:43] Then we have a chat about some of the key resources we can use. She presents us with a website that you found well, takes a lot of boxes that. 

Alec: [00:01:51] I never had. 

Bryce: [00:01:51] Sort of been looking.

Alec: [00:01:52] For. I'd never come across it before. Responsible Returns is the website. We'll include the link on the show notes. We'll let Daniela explain it in the interview. But it's great to say that there are some resources like this coming to market.

Bryce: [00:02:04] Absolutely. And we finish up by talking about some of the do's and don'ts and what to look out for when it comes to greenwashing and actually making investments in products.

Alec: [00:02:12] Do sustainable things, don't greenwash. 

Bryce: [00:02:15] I know. It's unbelievable. Just a reminder before we get going that we are licensed, but we're not aware of your personal circumstances. So any information on this show is for entertainment and education purposes. Any advice is general advice and also is a massive thank you to Fidelity for sponsoring this episode. 

Alec: [00:02:34] If you want to learn more about sustainable investing and the work that Fidelity is doing in this space, head to their website Fidelity Icon. Today You One thing we particularly appreciate is that they publish some case studies of the engagement that they're actually doing with Australian companies to drive more sustainable outcomes. So that's worth writing. And they also have a sustainability newsletter that you can sign up for if you want to keep up to date with everything in the world of sustainable investing. So at that price, let's get into it. 

Bryce: [00:03:05] Well, Danny, a big welcome to equity mates. Thank you for joining us.

Daniela: [00:03:09] Thank you for having me.

Bryce: [00:03:11] So we're going to start. Very general and we'd love to get you to define what greenwashing is and then elaborate on why it's continuing to make headlines around the world. 

Daniela: [00:03:22] Look, if you want to try to put it very simply. Greenwashing is using clothes for being environmentally friendly or socially responsibly friendly, depending on how you want to define it. But claims that are not necessarily true. And so if you put it like that, it's something that's pretty basic and simple. The challenge is that there's not much definition around what is green, what is sustainable, and the definition of true. It's a bit trickier to define as they are black and white. So so just to give you a sense, when we're talking about any products, let's say I'm saying that a product is organic. I'm thinking most of the product that makes, let's say a baby formula is organic. Most of the product will be organic. If I'm telling you this part of the school, the organic, that's what you expect. If I then look at the details and it turns out that only 5% of the ingredients were organic, it's not necessarily true. And so that's when there's like an immediate disconnect between what I've said to you and what I'm selling to you. What gets a bit trickier is when you're saying something is sustainable because the definition around organic might be a bit more simple. When you're talking about sustainable. It really is a little bit of what the sustainable means to you. What does green mean to you? And that's good. Align with what I mean. So I think I would just try to define and differentiate between especially when we're talking about investment products, between misleading and deceptive conduct, where I'm telling you that this product is absolutely tobacco free. And then you find, I don't know much more than that in the portfolio. So that's completely misleading. And that could be for many reasons. It could be an omission, it could be an operational issue that they didn't realise it. There wasn't a portfolio that they had over that or could be many reasons or it could be malicious as well. But that's very clear, black and white. Where it gets trickier is when you're using terms that are not necessarily absolute and what there's no clear definition, and that's when we get into a little bit a difference of opinion. What is sustainable. For me, it might not be sustainable to you. And so it is a tricky time both for consumers and for those of us that represent fidelity that are creating products, because it's we don't have a regulator coming up with a clear definition worse than it is. And the expectations from society varied depending on who you're asking. And therefore, for us as producers of investment products, it's difficult for us to try to marry whatever you might be expecting from a product. So I guess it is important to make that differentiation. But to your point of when are we seeing the headlines? So the headlines are mainly focussed on that. First definition that I gave you were saying that I'm doing something and I'm actually not doing it. So that's what you're seeing in Germany. There was a rating, a police raids and CEOs departing large firms. We're seeing here court cases by the regulator in Australia. We've seen some fines in the US. So that's the headlines that we're seeing. It's more in those very more egregious cases where I'm not doing what we're doing with this. That difference of opinion. It's not necessarily in the headlines, but it's in many people's minds. And so when people look at products, I don't necessarily know what they're thinking, but if this idea of what the product is doesn't match their expectations, that is when people might just become very sceptical about what they're buying or what they're investing in because it just didn't really match to expectations. And that's where that scepticism is a reality and there's not a very clear way of solving it. So we just need to learn to navigate it. 

Alec: [00:07:12] Now when we were preparing for this interview, I actually came across a term that I hadn't seen before. I've heard of greenwashing, but I was introduced to the term Green hushing. So for our audience who haven't heard of it before, can you introduce this term and what it means in an investing context? 

Daniela: [00:07:30] Sure. And I'll start with the beginning of it, which is greenwashing. Have you heard that one?

Alec: [00:07:34] I haven't, actually, no. 

Daniela: [00:07:37] Okay. So for those of us that started in the first day, like before, it was cool. So like ten, 15 years ago. So when I have to explain to everyone what it is and they really put me in the trio category and we're sitting at the back of conferences. So the idea of being now presenting to mainstream media, like in those days it would have been completely unthinkable. So for those of us that were there ages ago, we were in the cattle. We have green wishes. So we wanted change. We wanted mainstream finance to recognise all of this risk and the challenges, but also the opportunities that can come with investing in finance. So that's the green wish. Then all of a sudden green or ESG becomes cool, becomes mainstream, and so everyone jumps on the green bandwagon and consumers are like, Yeah, I definitely want this. I know I can make my money work for the causes that I care about. And so all of a sudden people selling products are like, Great. There's a new market. I just need to create the right product. And because we have this challenge that I've just explained for one of it is a marketing issue, but everyone starts creating. So we see an influx of product and that's when the regulator gets concerned and they say, Wait a minute, I need to protect consumers. We can't just have people offering this products. Who knows what's in there? Who knows if it's really meeting expectations. So therefore, we need to regulate this. And so we see regulators around the world paying attention to it and trying to figure out how they define sustainability or how they protect consumers. And so once that happens, because the nations that are green are very much focussed on creating goodwill. Trust. Trust is one of the most important things first, that an asset manager wants. And second, if you're selling a sustainable product, trust is more important, right? So the moment that you see that you're exposing yourself to greenwashing, not only even legal breaches or legal cases, but just the potential implication of your name being associated to greenwashing. It ends up being like, I'm terrified of that, so therefore I'd rather not say anything. And if I stay out of the discussion, even though I might be doing all these great things, I might be managing the portfolios, very aware of climate risk and might not be investing in thermal coal or I might not be, but be very leaning to investing in renewables because that's where I see opportunities. I decide to not say anything because I want to protect myself. So I go to the going hushing. Now we see a regulator in Australia now saying that greenwashing is a form of the green hushing. So not telling people what you're actually doing is also a form of greenwashing. So it's getting a bit complex since you can't win. I think that's why on a stage and it's just a matter of maturity, right? So we're coming from a very nice thing to becoming mainstream and I just see all of these are really as really growing pains of an industry that's trying to find what it really is, find its place funded, but realise that it's not the other promise that in many cases it's made out to be. But there is a lot of really good things that can happen from it. So that's from greenwashing to greenwashing.

Bryce: [00:10:53] They go learn something new Greenwashing. Who would have thought, Where does it go to next? Green? I can't think of anything anyway, Danny, you mentioned regulators there, and we've seen ESG regulations evolve at a pretty rapid pace over the last few years. So interested to understand a bit more about the direction of policy and regulation that is coming out from, you know, countries around the world. So you have to help us understand a bit about that. 

Daniela: [00:11:23] I will. And look, I have a colleague of mine that actually when he presents about this topic, he says that regulation can be fascinating and regulation regarding investment products can be really fascinating. I always giggle a little bit when he says that because I personally don't find it fascinating. It's not the part that I enjoy most of my job. So what I'm going to try to do is not bore your listeners too much with the detail of it and try to explain it better, more higher level, how I see it. So as I've said, regulators around the world see this massive influx and the need to protect consumers. And not everyone does it in the same way. So you can imagine for a global asset manager like Fidelity, it's a bit of a nightmare because we need to try to ensure that we're meeting regulations around the world but ensure consistency across our products. But anyway, that's a separate problem. Regulation is really focussed. So we've seen three kind of different types of regulation. One of them is really just focussed investors. So some regulators around the world are really focussed in ensuring that asset managers are considering the risks that come from ESG or the risks that come from climate change, because it is basically something that's going to impact returns for investors in the long term. There's another group of regulators that are really focussed on labels. So if you think about and they tried to define so it's a little bit more like a nanny state type where you're actually trying to really draw clear lines around what's a lot of what's not allowed. And so it's very tough and a bit more black and white and you are actually trying to dare to try to tell us if you want to call this something sustainable, you need to ensure that your product has so and so on. So characteristics. And we're seeing that a little bit more in Europe. So it's a bit more prescriptive. That would be my favourite if I would have to choose because it's a lot easier to know when you're on the and when you're on the roll, right? It's a lot easier to say, okay, if I follow this directions, it's going to I don't have any exposure to greenwashing. And then the third case is a little bit where the Arctic is going, which is like a full disclosure. So they're saying, I'm not going to tell you what sustainable means. You define how you think, but ensure that your consumers really understand it. So it's very much for very detailed disclosures. It really puts the onus on the asset manager to disclose a lot and then on the consumer to have to review. And look at and review and look under the hood of what actually you're finding. So there's a lot of focus in that reading and disclosure understanding with how each manager's defining it. So if I'm trying to find an analogy between like nutrition guidelines, have you seen the health stories that we see in the supermarket that's more of the European way. So it's a lot easier. Just like you just love the number of stores and you buy whatever you want. The weather regulator in Australia is the directions guide is much more focussed that you will have very detailed, complex nutrition labels that you will actually cut to reveal in detail, understand what they are and define How much protein do you want to have a sugar do on the exact same way you can kind of it is the onus on the consumer to really understand how each manager's defining it. 

Alec: [00:14:41] So I guess I assume it's early days in Australia's journey and ASIC's journey regulating it, but how has it gone so far? What are we seeing in the Australian landscape? Are there any stories or anecdotes about, you know, what's happening in Australian finance at the moment? 

Daniela: [00:14:59] Look, I think Isaac has come out recently with a new report where it actually showed how much work they've done in the last nine months since they issued their initial guidance. So sorry. And just to clarify, ASIC's is not their focus. There's no new regulation around this. It's still focus on misleading and deceptive content. What they've issued, I think it was probably a year now they've pushed to 7 to 1, which actually outlines how they its guidance or what they consider to be greenwashing and kind of what to do to avoid it. And since then, ten months later, they released a report where they said that the action was taken. And basically that provided a set of examples without naming and shaming, except for what's already in the media that is saying, for example, we a mining company that had said that they'd done scenario analysis and so on. So we've actually asked them for this level of detail. And so that's basically helping us really understand what exactly is actually looking for when they're looking at products. So that's what we know so far. But as I said, it's very user centric, unlike in other markets I think is really worried even about the marketing so that there is a Facebook posting something or something in social media I think will be regulating that type of content. It's very user centric. They're not expecting all the users to go and read all the PDFs so that the focus and any marketing material. And then it's just that very evidence detail disclosure. So provide me an evidence or provide an example of how do you justify that.

Alec: [00:16:40] Yeah, okay. From the interviews that we've done on this podcast and I guess just the people we've spoken to from doing Equity Mates, it seems to our mind like the big challenge comes in sustainability and ESG can sort of mean different things to different people. And I think the classic example we see is there are some fund managers who will take a divestment approach and then other fund managers will take a more of an engagement approach and make the argument that you need to invest in these unsustainable businesses to allow them to transition to more sustainable operations. I'd be interested to know how you think about it, but also I'd be interested to know how the regulator is in Australia thinking about, I guess, the different meanings of this one term. 

Daniela: [00:17:25] From the regulator. Again, they're not at this point defining anything. So whatever you're saying, if I think sustainability something like you need to think about who the main user is and but also disclose your definition of what you're saying, it is so that so far what we've seen, eventually we know the industry and I'm and there's a group, there's an initiative called ASFI, which is actually developing a taxonomy for the finance sector to define what's green and what's not green. So as far as the Finance Institute's developing a taxonomy with multiple people from the ecosystem and the Treasurer has endorsed this, and so then that will give us a bit more guidance, for example, on defining if I'm saying I'm investing green things and according to that taxonomy. So that categorisation taxonomy sounds really boring, but it is important because it will allow us to define, Oh, this is green and this is not green or this is sustainable, this is not sustainable. But we're still a while from having that. So at this point it is very much how everyone discloses their definitions of such, the way I think about that. Back to a question about how to think about exclusions, engagement, divestment. To me it's all about personal preference, but really understanding what is it that you're trying to achieve? What is your theory of change or what is yours? Sustainable investment beliefs, however you want to call them, and then matching those, translating those two years, do you speak? So, for example, if you really hate anything that has to do with tobacco and you are like, I have a history and I have family history and I just don't like tobacco, I want to ensure that none of my funds are invested in tobacco. Then you would go for a very good exclusionary approach. And then what you really need to look at is that threshold? So are you excluding every single company that makes any money from tobacco, that means that you might be excluding, for example, supermarket chains that sell tobacco. And so you need to be ready and understand the implications of all that so that if you have that type of approach, if you think that the world that there is a misallocation to capital, to low carbon opportunities and you think that this is the right time to invest for better long term returns in businesses that are sustainable, because in the long run that's where the world is going? Then what you might be looking for is for a really strong ESG integration. So really looking for those managers that have a very systematic approach to ensuring that they're investing in those businesses that are really thinking of sustainability in the long term and that are aligning their business models to that. If you have a very strong belief that one specific topic, so for example, water or critical minerals and you are like, I really think this is an area that not many people have meditation, there's a massive opportunity. Then you're looking for those most thematic funds. But then if what you're looking for is to really be part of a systemic change, recognise that an exclusive approach to not investing fossil fuels, I mean that those fossil not emitting carbon emissions in the real world. So if you fully understand that and what you want to be as part of that, more systemic change, what you will be looking for is for investment managers, not necessarily the product. So I think if you think about that more systemic level and you're interested in that change, so you have that theory of change that we need those brown industries to turn green to achieve that change, then what you're looking for is for that very strong engagement strategy. And when you talk about engagement, I see it as less product oriented and more firm. So you're looking for those asset managers that have been able to demonstrate that they're having those very robust conversations that have voted in alignment with what they say they're voting and how to look for that. It is the way I think about it. Many people say you need to show that they have policies and that, look, the policies are great and most people have one. And even for someone that has looked at the multiple of these, it's kind of difficult to tell a good marker about what I mean, you might spend hours. To me, it's all about the case studies. So if you see a case study about an engagement to look for case studies of companies, so if they're saying they're investing in utilities that are going from bad to great look for case studies and it actually just needs to make sense. Right. If you would be talking to the board of a utility company in Australia and you want them to phase out thermal coal to go and invest that have more renewables in their mix, you want to see that in their case study. And if you would be that person having the conversations at board level with a utilities company in Australia or an oil and gas company in Australia, does that study reflect the conversations you would want to have? And I think that's where you can really evidence that engagement and really seeing that there's a clear theory of change and then escalation. So if that doesn't happen, has the manager ever had any evidence of we vote against if things are not changing as fast as we want? So I can see that there's potentially some questions on that front. 

Alec: [00:22:45] Yeah, I think, you know, hearing all that, it all makes sense. But I come back to the fact that I have a tiny amount of money and I'm time poor. And you know, you even mentioned there sometimes unless you really dig into it, you sometimes find it difficult to find the good from the bad. So for someone like me that wants to do the right thing and wants to impact where I can but isn't an expert and let's be honest, I'm lazy, so I'm not going to read like pages and pages of some of these reports. Are there any things that I can do, any resources or any shortcuts for someone like me?

Daniela: [00:23:27] Like I understand that. But the challenges as I was mentioning, the regulator is really focussed on the consumer doing the whole yeah, we don't have so you can so you might be familiar. So there's a website called Responsible Returns which is a by the Responsible Investment Association of Australia that I mentioned before. I'm a board member and they are trying to kind of differentiate. Products. So if you, for example, want a product, they and they certify that the products are truly reliable. So if you go to their website and say, I don't have an exposure to tobacco and you can tick the box and then will spit out whatever products they have registered. So that's one of the ways. The challenge with that is that it's very product driven and that systemic change that I was talking to you about. So that engagement piece, which is really it sounds really boring, but it's so important to me. That's the main way in which I feel to my job I achieve any change more than actually the products are important, but to me it's more about that engagement that is a bit harder. And at this point there's not much in the UK have the UK Stewardship code and if for example somebody goes and checks their website and they have signed up, they have done this due diligence and read all this and ensure that the case studies make sense and all this, but we don't have anything like this in Australia at this point. So if you're really you have like 2 minutes, go to the website of the asset manager, look for case studies, read the case studies, if that makes sense to you. If it's detailed enough and it's giving you evidence, I think that's where I spend my time. If I would be interested in systemic change. 

Alec: [00:25:10] Well, I've got to be honest, I had never heard of responsible returns before. I'm looking at Bryce to see if he had either. And I've just jumped on the website and it's great. Like it, it's definitely a step in the right direction for someone like me who just wants, I guess, someone else to do all the work again. 

Bryce: [00:25:30] But that's what you need with all this stuff. Someone else to do the work. Yeah, yeah, yeah. There's just so many. It's. Yeah, it's overwhelming. 

Alec: [00:25:39] It is overwhelming. Overwhelming. So much to consider. And you know, I think, Danny, you said earlier what your theory of change is. And for me I will hear someone who has a divestment approach and I will be fully bought in by the end of the interview on what they're saying. And then I'll speak to someone who takes an engagement approach and I'll be like, Yeah, we need to give these companies capital to transition their business models that I'll be fully put in. So I think the challenge for me is that I have a very malleable theory of change also. 

Bryce: [00:26:10] Danni, I guess one follow up to that as well. Are there any things that we should keep an eye out to avoid if we're looking at products or managers that I guess it's hard to identify greenwashing, just bang, but like. 

Alec: [00:26:24] Yeah, what are the red flags? 

Bryce: [00:26:25] What are the red flags? Yeah, that we should keep an eye on or keep an eye out for.

Daniela: [00:26:31] One of the obvious red flags, but I'm sceptical about this one is look at the whole thing. The problem with looking at holdings is that then it really depends on your definition of sustainability to see if it makes sense or not. And my favourite example of this is for example, if I have a sustainable fund and I'm trying to do my homework, so if I'm looking at sensible funds or sustainability and I'm trying to do my homework, I can look at the holdings and then all of a sudden I find a lot of mining stocks, I'm going to be like, What? I thought mining was bad. Like they've spent years telling us that mining is bad. Like how can this be a sustainable fund? And then now me, I've spent the last two years and I'm a bit obsessed with mining now because I see it as Oh yeah, I never thought I would say that. Actually. My brothers were laughing about that the other day. Like I'm really obsessed with mining because the role of mining decarbonisation, we've even written a very long paper that took me just about, but I see it as a massive bottleneck for decarbonisation and now we see it in the media. So we've seen it. But since then, the last few months Australia has a massive opportunity too, but I've been obsessed with it for like maybe two years. But there's a massive bottleneck there and there's a lot of money that needs to go into not only lithium and lithium processing and rare earths and it's beyond, but it's things like stillbirth for a solar panels. So it's quite complex. And so in my if I put a sustainable fund, I might have like a critical minerals or transition materials that that I plug as sustainable because I see it as key to alleviating that bottleneck on critical minerals that are quote, to batteries, etc.. However, when you go and look under the hood and you look at the holdings, you are going to be like, why do you have all this mining companies there? I thought they were destroying everything and biodiversity and and their emissions and they're displacing people and they're blowing up stuff. So unfortunately, I wish I could have a short answer for you, but I just in terms of red flags, I would just say you need to read and try to define what is it that you want to achieve. And I would say look beyond the product, look at the asset manager and try to understand what they're saying beyond the product itself. Sometimes it doesn't do enough. 

Bryce: [00:28:51] It's got. Be a role for I in all of this to help us to help us get to the end end result. 

Alec: [00:28:56] I mean, the most helpful I could be is to help us actually alleviate climate change. 

Bryce: [00:29:01] That's not to get to that. Like, you know, and I. Oh, good, good. Anyway, Tony, that does bring us to the end of our convo today. I think we've really appreciated chatting to you. Are there any other, I guess, areas that investors can seek guidance on this? You've mentioned responsible returns dot com that you will include a note to that. You mentioned having a look at case studies, but I think just given your wealth of experience and knowledge, people are looking for that additional sort of advice. Where could they be looking? 

Daniela: [00:29:35] As annoying as it might be, looking at websites of fund managers looking at the detail, for example, active managers versus like they know the companies pretty well and there's a wealth of research and reports and some of them are boring, but some of them are interesting for the everyday person. And so I would just say really for that knowledge from lectures, they're research themes, but there's a whole heap of work, for example, biodiversity. What do you think about that? It can invest in a exclusionary fund based on what you probably know, but you need to understand that your manager is actually looking at the detail of biodiversity risks. Yeah, in terms of resources, things that come to mind at this point is the RIA recertification and then in the UK you have the UK Stewardship code. If you see any products that are listed on both, you can look at asset managers from that perspective. But yeah, that's, that's the main things that come to mind at this point. 

Alec: [00:30:42] Well, Danny, you didn't, you mentioned going to websites of active managers and we should give a shout out to Fidelity's website if people go there fidelity dot com to let you and you go to the sustainable investing tab at the top. You do publish a number of case studies that's around your engagement with a number of different companies Commonwealth Bank, Cleanaway, Origin Energy, a whole bunch. So if people do want to say I guess what disclosure could look like and probably should look like from all fund managers, that's a good place to go. 

Daniela: [00:31:16] And we have a really cool mining paper called the Decarbonisation and mining powered. 

Bryce: [00:31:20] Someone's keen on mining. 

Daniela: [00:31:23] Which runs a bit. 

Bryce: [00:31:27] Love it. We'll, we'll, we'll leave it there. Danny, thank you so much for coming on as we always discuss or feel like you know when we finish conversations like this, there is always plenty to learn when it comes to this topic and having experts like yourself to help us understand it goes a long way. So we do really appreciate it. And thank you very much. 

Daniela: [00:31:45] Anytime. Thank you. Thank you very much for having me.