The pandemic has brought a number of ESG themes to the forefront. In regards to the environment, we’ve seen an increase in net-zero emissions pledges in recent months. Social concerns include firms making the health and safety of their workforce a priority. And as for governance, what effects do virtual annual meetings have on shareholder rights? In this Q&A with various RBC Global Asset Management investment teams, they discuss these topics and more.
Our teams are in a host of cities across North America, Europe, and Asia, and they bring a diverse set of perspectives to bear on the challenges – and opportunities – facing investors today.
What sort of contingent assets have you seen come to light throughout the COVID-19 pandemic?
RBC Global Equity team (London)
The RBC Global Equity team looks for businesses that create contingent assets – or intangible assets that we believe will generate value for shareholders over the long term (e.g., corporate culture, sustainable business practices, etc.). In the first half of the year, we saw many examples of companies sacrificing short-term profits to respond to the pandemic and this being rewarded by an increase in the firms’ values. Companies invested in the health and safety of their employees and the communities they operate in switched production to make Personal Protective Equipment (PPE) for healthcare workers, and extended paid vacation time for employees to cope with the stress and demands of the virus’ impact. We believe commitments to social factors like a strong workplace culture as well as robust employee management and development can lead to increased employee engagement, productivity, innovation, and retention–all of which can create long-term value for companies and their investors.
During the pandemic, how important has messaging from the top been for companies with smaller workforces?
RBC U.S. Equity team (Boston)
The RBC U.S. Equity team in Boston is primarily investing in micro- and small- to mid-cap companies. Throughout the pandemic, we’ve engaged with investee companies on their employee management practices. We’ve seen instances of management teams leading by example, taking salary cuts and forfeiting bonuses, as well as examples of clear, transparent communication to employees on the importance of, and their commitment to, health and safety practices. In our view, this focus on a company’s people is material to all businesses, regardless of size, but can be especially important for smaller companies navigating the challenges of the pandemic.
Has the COVID-19 pandemic shown us anything about the opportunities in “social infrastructure” in emerging markets?
RBC Emerging Markets Equity team (London)
The RBC Emerging Markets Equity team defines social infrastructure as essential public assets and services that support peoples’ daily lives and have a significant impact on their standard of living. While we have seen unprecedented demand for infrastructure assets in emerging markets (EM), consistent underinvestment has led to substantial shortfalls in the quality and quantity of infrastructure.
Social infrastructure assets support the sustainable growth and development of a country and play a vital role in helping the rapid rise of the EM middle class. The pandemic has heightened awareness of social and environmental factors, and we feel that these are becoming increasing sources of both opportunity and risk. We have therefore decided to focus our infrastructure theme on green infrastructure.
It is likely that efforts to grow certain areas of infrastructure, such as smart cities and social infrastructure, will be better supported in the future. The pandemic has emphasized the importance of social infrastructure in areas such as healthcare, sanitation, housing, and education. For example, if we look at healthcare specifically, underinvestment has contributed to the healthcare infrastructure of EM lagging that of developed markets both in terms of quality and quantity. In our view, COVID-19 has accelerated the demand for healthcare services in EM, and while we expect significant government spending over the next decade, we believe there is an opportunity for the private sector as well.
How have the impacts of the pandemic on technology fit into your investment process?
RBC European Equity team (London)
The RBC European Equity team has thoroughly researched the long-term impacts of technological disruption. The pandemic has illustrated technological disruptions across sectors, including the capabilities of remote work and changes to the ways we access and consume goods. We believe this exemplifies our view that technology crosses every branch of commerce and all sectors, which is why whenever we look at a new idea to invest in, we ask the question, “Will the sustainability of the business model be affected by technological disruption?” We engage with management teams to get their views and strategic thinking related to potential disruptions and long-term trends, but we also pay close attention to a company’s focus on innovation, as it can be a source of both risk mitigation and opportunity.
How transparent have boards and management been regarding delays or reduced prioritization of ESG initiatives as companies dealt with the risks posed by the pandemic?
RBC North American Equity team (Toronto)
The RBC North American Equity team has several ongoing engagements with investee companies on ESG initiatives, such as those designed to reduce greenhouse gas emissions. Our engagements with companies on any postponed or stalled ESG initiatives were largely candid and transparent. At the outset of the pandemic, we had regular conversations with boards and management of investee companies on their financial status and forward-looking strategies as they grappled with the economic impacts of the pandemic. As long-term investors, we recognized the need for companies to deal with some of the most acute and severe risks, but also saw companies maintaining their long-term focus, including on ESG initiatives. If we look at environmental projects, for instance, we were encouraged to see so many companies emphasizing their continued commitment to projects that would reduce emissions or emissions intensity.
We’ve seen significant progress on ESG factors in several Asian markets in the last few years. Has COVID-19 stalled that progress or are we seeing continued momentum for increased disclosure, improved governance, and investments in climate-related solutions?
RBC Asian Equity team (Hong Kong)
In the second half of 2020, we saw some notable ESG commitments out of Asia. In October, both South Korea and Japan set targets of carbon neutrality by 2050. This came after President Xi Jinping of China announced a net-zero target for 2060. If met, this latter commitment by China alone could have substantial impacts on global emissions overall. These commitments come amidst recent improvements in overall corporate governance standards and practices in the region. For instance, in Japan, since launching the Japan Stewardship Code in 2014, we’ve seen increased levels of board independence, increased use of shareholder proposals, and some improvements to board gender diversity levels. Markets such as South Korea, India, and Taiwan have all launched their own respective stewardship codes as well, so we expect to see continued momentum on these fronts, complementing our ESG integration process and engagements with investee companies on enhancing their ESG disclosures.
Have you noticed any wider trends in responsible investment during the pandemic? Has there been an upsurge of interest in responsible investing?
Yes. The market statistics on scale and pace of asset flows into ESG-themed funds, both passive and active, for 2020 show these have been at a record high. Whilst COVID-19 could be a tipping point for ESG, it is important to point out that the pandemic is only accelerating a trend in ESG investing which was already in place. But the strong performance of ESG-themed funds during this challenging year has certainly attracted some to this market who may not have done so. In our view, the drivers for this have been a mix of increasing societal concerns about environmental and social problems such as climate change and inequalities, but also a result of increasing ESG regulation.
Companies were forced to modify their annual meetings during the 2020 proxy season to a virtual-only format, but a virtual meeting carries some risks for shareholder rights. What do you expect from companies when it comes to shareholder meetings going forward?
PH&N Canadian Equity team (Vancouver)
We don’t believe that a virtual-only meeting experience is directly comparable to an in-person experience for all shareholders. For example, virtual-only meetings may facilitate the vetting or filtering of tough questions for boards and management. That said, virtual meetings also allow more shareholders to attend shareholder meetings, so there are some benefits. In our view, in the absence of health and safety concerns, a hybrid meeting format that combines a traditional in-person meeting with virtual participation is appropriate. Where virtual participation is used, we do expect robust disclosure from companies on meeting procedures, how shareholder rights are being protected, and how shareholders can ask questions during the meeting.
The pandemic has had many direct impacts on businesses, but many downstream and indirect impacts as well. What are some ESG factors considered in your investment process where we may see the impacts of COVID-19 playing out for years to come?
RBC U.S. Growth Equity team (Chicago)
One unknown element going forward relates to employee training and advancement opportunities in a work from home environment. Many employees – and more junior employees, especially – develop by observing and working closely with leaders or mentors. At this time, virtual meetings and interactions may not provide those employees with this same experience, so companies will need to thoughtfully consider their approach and how it could impact employee retention, satisfaction, and development.
Funding for green bonds was increasing prior to the pandemic. But we’ve also seen bonds used to fund social initiatives. Did we see any examples of social bonds linked to COVID-19 and how do they generally work?
RBC Global Fixed Income team (Toronto)
One specific example in Europe is a social bond, issued by the European Union (EU) under the €100 billion SURE program, which provides “Support to mitigate Unemployment Risks in an Emergency.” We have invested in this new instrument. The program provides common funding to EU member states to fight economic and social impacts of the pandemic by preserving employment and financing health-related measures at workplaces to ensure a safe return to normal economic activity.
To finance the program, the European Commission issued social bonds adhering to a Social Bond Framework which describes the use of proceeds to fulfill social objectives. The framework also includes reporting requirements for member states and defines how the funded initiatives contribute towards the United Nations Sustainable Development Goals. In 2020, the European Commission issued nearly €40 billion in social bonds through SURE.
What ESG trends have we seen in Canadian corporate credit, specifically? Has there been a change in these trends throughout the pandemic?
PH&N Canadian Fixed Income team (Vancouver)
Over the course of 2020, the Canadian investment grade corporate bond market saw just under $5-billion in green bond issuance, which is approximately 70% more than in 2019. It also became clear that corporate issuers are more aware of the need to improve ESG reporting and in many cases made public commitments on GHG emission reduction targets. Notably, this theme was present across various sectors. For example, in REITs we saw a number of new green bond deals with issuers providing detailed frameworks and third party verified use of proceeds. And in the energy sector, some of Canada’s largest entities released their climate change plans that focused on transition and decarbonization. This included some firm goals of becoming net carbon neutral by 2050 with milestone targets along the way and commitments to using their size and scale to encourage advancing solutions that would help Canada as a whole reach net zero by 2050. We are pleased to see the increasing degree of ESG awareness and expect this theme to continue as Canada looks to embark on a path to recovery.