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From ESG considerations to the role of private equity; these are just some of the key topics of discussion between portfolio managers and company management. Stu Kedwell, Co-Head of North American Equities, talks about the importance of engaging with companies to help guide decision-making and meet their near- and long-term objectives. [8 minutes, 17 seconds] (Recorded June 9, 2021)

Transcript

Hello and welcome to The Download. I'm your host, Dave Richardson. And it is (S)Tuesdays, on Wednesday. More tough scheduling for us Stu, we're awfully busy fellas.

That's right.

Or at least you are. If I'm being honest, I had time. It’s Stu who’s so busy in important conferences, watching everything that's going on in the market, meeting with key business leaders all across Canada— virtually, in a safe space, even though you’re vaccinated. Anything interesting you've attended recently?

This time of year, a lot of boards are doing some strategic off sites and things like this, so, thankfully for us, they often invite us in to give the perspective of a shareholder, about what we're seeing in the environment, how we're thinking about their business. Increasingly, these involve ESG discussions, but also, the focus on operations, M&A that might be taking place in the environment and our thoughts about that, and how to maximize the per-share value of the business over a long period of time. Many of our companies ask us about the role of private equity because that's gaining steam. And these are deep pocketed individuals that they have to compete against. So we have discussions around that. But a lot on the ESG front, for sure, with everything that's going on in carbon. We had the big announcement this morning amongst the producers in Alberta about how we can get to net zero by 2050 and carbon capture is going to play a big role in that. People ask about the government's role in that, and we'll see. But I think financial markets are going to be really the big disciplinarian, in terms of providing capital above and beyond what might take place from a regulatory standpoint, because we're just seeing so much focus not just from an equity standpoint, but bondholders and all sorts of things, really affecting how capital is going to flow around the economy. We want to make sure our businesses are on the right side of that, that the balance sheets are well positioned, that they're doing what's necessary so that the cash flows are there for a very long period of time. So those have been some of the big discussions in the last week. It is a slower time, but we've had a couple of bank CEO meetings. All good things. It's been a busy time.

Wow, hobnobbing with the biggest and the best. That's Stu Kedwell’s life. So we veered off. In full transparency, Stu and I usually consult for at least a couple of minutes before we get on to tape about what we're going to talk about so that neither of us crosses each other up. So we were going to go in a different direction than the way we've gone. But let's continue along this path Stu, if you're open to it. ESG itself and talking about how this is a big part of the discussion, certainly in Canada with what we have in terms of mining, energy stocks, et cetera, and concerns there. As a portfolio manager, do you view ESG in any way as a constraint or do you really view this as something that's really positive and that is part of a better risk management, not just for you in terms of the money that you manage, but for the companies that you're working with?

Well, I think it's going to be a positive for sure, on a longer term. We have taken the route of engagement. So just like the discussion that we've talked about, we're in with the businesses and we want a seat at the table to understand about how they're going to meet the increasing needs that society is putting on them, which we think is the right way to go. There are others that are just divesting and we're not part of that camp. We had this discussion with one of the energy companies last week; last year when you had to deal with the combination of a decline in demand with a tsunami of disinvestment, it was extremely hard on the share prices. And we're only human. People can look at share prices and say, well, that doesn't reflect very highly on the future of this business. But it was really the combination of those two things. And we think that the shareholder bases have significantly changed hands so that the people that own the businesses now are here for the future game plan, which is going to involve how do we reduce the carbon footprint of these businesses. So that's the approach that we take. We see it as a positive. How do we understand how the terminal value of the business can be protected and growing over time and support these management teams? It's not just carbon. We have investments in a company that's removing its coal generation and switching to natural gas and investing in renewables. In meat processing, we have new non-meat protein businesses. We have all sorts of investments where we want to understand how can we tilt the business to benefit for the future. And there's a significant overlap with many of the ESG issues that we talk about day to day.

And just because I forgot to do it at the front end again, and for anyone who's a new listener— and hopefully go back and listen to a lot of great insights that Stu has—, but Stu has this seat at the table because he is the co-head of North American Equities at RBC Global Asset Management. Stu oversees billions of dollars in client investments. Because of his background and reputation, he has the opportunity to, as he says, engage companies in a way that, again, is helpful for his investors. And his insights are helpful in guiding decision making for those companies, or at least the understanding of that. Is that a good way of saying it or would you have a better way of describing it?

I think that's fair. We're fortunate; a lot of management teams look at us and say, we don't always have the exact same objectives, but they're quite similar. We want to see the business do well over time. We want to understand. The business is going to generate capital. What is it going to do with it? How much should they give back to us? How much should they retain? What are they going to invest the capital into? What type of returns are they going to get? Those are the exact same things that are going on at the boardroom table. And we try and think about the business in a scenario-based approach, which we think is the way management thinks about the business. There's no CEO that doesn't know that occasionally some bad things are going to happen to their business. We want to know that they're prepared in advance for those. So, we try and have discussions that they find worthwhile and show that we're both on the same page. We want to compound our capital over long periods of time for the benefit of our unitholders to get them to their goals. I think most CEOs respect that.

Really interesting insight on part of the process behind the scenes for investors. So thanks for letting me take you down this path. And for the listeners of the podcast, you've got to come back next Tuesday for the exciting topic we were going to cover today, because it really is an awesome one, isn't it?

They're always awesome, Dave.

All right. Thanks Stu and we'll talk to you next week.

Take care.

Disclosure

Recorded: June 9, 2021

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