Hello, and welcome to Personally Invested. I’m your host Dave Richardson. Today, we have a great discussion with Melanie Adams, who is the VP and Head of Corporate Governance and Responsible Investing at RBC Global Asset Management. So many investors ask questions about ESG—environment, social, and governance—and how these factors affect investment managers’ decisions around investing in companies all around the world. Investment managers, institutional investors, and now retail investors are starting to embrace the idea that you no longer have to sacrifice returns by evaluating companies based on how they perform against the environment; how they treat their employees well; how they keep just good accounting records. These are all factors in driving the success of companies, and ultimately then, how well that company is going to perform and how you build portfolios as an investor. I think you’ll really enjoy the conversation with Melanie. She is a passionate advocate for these issues, and she’s really bringing ESG to the forefront of the Canadian investment industry.
All right, I’m here with, Melanie Elaine Sarah Gertruda Adams. That’s your—so your middle name itself has the initials ESG.
Oh, I see. I see where you’re going with that. Um, not quite my middle name, but…
Would, would you reveal your middle name? Esmerelda?
Absolutely. It’s Jane.
So, but, obviously as we, as we introduced her, Melanie, leads our program around, ESG at RBC Global Asset Management. And we’re going to get into that, but I think what we like to do on this podcast is get to know the people that are behind some of these huge endeavours at Canada’s largest investment manager. So, where are you from? And how did you start your journey into the investment management business?
Sure. First of all, thanks very much for having me here. I’m very happy to be here. I did not start in asset management or in even the finance world initially. I am a lawyer by background. My undergrad degree is in science.
I minored in economics, so maybe there’s a little bit of a connection there. And when I started practicing law, I, I started working at the Ontario Securities Commission as enforcement counsel.
And then I became very involved in the securities industry, obviously. And I worked there at the Securities Commission for a while. I did a secondment to the criminal courts as a Crown prosecutor. And then I eventually made my way over to another financial institution where I did, fraud was my specialty.
I did litigation for that bank. And then an opportunity arose here at RBC GAM when RBC GAM was thinking about responsible investment. And I came over here to RBC GAM. I’ve been here for almost six years now and have spent some time in various areas around GAM in the operations area looking at risk and audit work, as well as doing strategy work, as well as ESG over the years. So it’s been, ah, it’s been a really exciting journey.
And so, what do you think is the big difference you see between the legal world that you were in and the enforcement world versus coming inside to an asset manager and just the experience you have in terms of the culture of the organizations, the way they operate?
So there’s a lot of similarities in coming from the legal world into the asset management world. As you, of course, know, we have a lot of regulation and…
…and policy that we’re subjected to.
And it’s the same in ESG. There have been a tremendous amount of policy developments on a global front in ESG. We’ve seen a lot in Canada as well. Earlier this summer, the Canadian Securities Administrators came out with a national instrument stating that climate change may be a material risk that needs to be included in a company’s disclosures. And so that’s been really interesting, and so it’s been on a number of fronts. We’ve seen movement on diversity initiatives globally. In the U.S. there’s been some movement on proxy voting in that policy space. So, there’s been certainly a lot of overlap. Some things that are quite different from of course being in the legal world, we’re not as argumentative here.
We try to get along more than we try to oppose each other
Yeah. And, I think, really, RBC GAM has a great culture. We’re a really friendly group of people, and it’s a great place to work.
Okay. And we may come back and do an evaluation of RBC Global Asset Management—
From an ESG perspective, but just sticking with you and how you got here and got to this place because I, I think it’s really important that people understand your role and your background on how you got here because I, really believe that you’ve got to have a passion around this issue to really drive it home inside of a large organization. So, what really created your interest? And would you describe yourself as a passionate person around these ESG factors and driving this responsible investment movement? Ah, or is this just a job?
Well, I am very passionate about it. I think that it’s critical that we be aware of the ESG factors and what’s happening in climate change, for example. We know this is one of the most pressing issues right now that’s happening, and we all own a piece of that. And, so I think you have to be in this space. It’s a mind-set. You really can’t do ESG just as a job. You need to be really committed to the space. You know, I believe that when we think about ESG factors, we really can enhance the long-term profitability of our funds or, returns of our funds.
So, you know this is something that I do truly believe. And I don’t think you can be in this space and only do it partway.
Now did this start when you were younger? Or is this an awareness that’s built up over time? Is this something you’ve always been interested in?
I have been. Actually, when I was young, I remember sponsoring an acre of rainforest. I had a lemonade stand and raised money, and that’s what I used it for. I think it was quite discouraging, though, when I found out you were only sponsoring it for a year and then you’ve got to do it all again. So, I had a club with one of my friends, and that’s what we did.
So a young Greta Thunberg? Maybe not at that level.
I wouldn’t say I ever had her platform.
But you had the desire to do it. So let’s get into ESG itself. We’ve thrown out the acronym now. So why don’t you explain, from your perspective, what ESG stands for, give the actual outlay of the three letters and then what you think it means to our clients from an investment perspective?
Absolutely. So in terms of ESG, the E is environmental. When we think about that, we think about climate change risks and opportunities, biodiversity, water usage. When we think about the S, that stands for social. The types of things that we’re thinking about under the social category include cybersecurity risk, supply chain risk, workplace health and safety. And then finally the G, which is last in the acronym, but it’s arguably the most important, is governance. So when we think about governance, we’re thinking about what’s the composition of the board? What is the structure of the board? Is there good board diversity? Are there good policies in place to oversee the E and the S risks? And how is a company managing that? And so that’s the ESG acronym. But when we think about responsible investment generally, responsible investment is a broad term, and there’s a number of different approaches under responsible investment. And this is where there gets to be a little bit of confusion. There are so many acronyms, there are so many definitions in this industry, but I think a very easy way to sort of break it down and understand what it is, is to think of it in three main buckets under responsible investment. The first one is ESG integration.
And what we’re doing when we think about ESG integration is we’re looking at these ESG factors as they relate to an investee company. What is that company doing? How are they managing these risks and opportunities? And we look at how that—whether that’s been priced into the share price or not.
And then we make an investment decision based on that. But we’re not saying, I will not invest in an entire sector or, you know, or in a region or something like that based on those on a wholesale screen. This is just a case-by-case looking at the factors as they pertain to each company.
And the second area is socially responsible investing. This is called SRI.
That’s right. And we have a line of Vision Funds that are SRI funds. And what these do is they apply a screen that screens out sectors based on our values. And so if a, if a client decides that they don’t want to invest—for example, we have a Fossil Fuel Free Fund—they don’t want to invest in that, and that’s fine, we have that available for them. If an investor decides they don’t like tobacco, pornography, gambling, alcohol, there’s a list of different screens that we apply for our Vision Funds.
And that’s becoming a much more common way that North American investors think about investing. That they do want to at times apply their values. Perhaps an example would be in the U.S. not owning an investment fund that has gun manufacturers in it.
Yes. Absolutely. So we are seeing investors decide—and we call that investing in line with your values as opposed to values-based, investing where we’re looking at the value of a company, the valuation. That’s more the ESG integration.
And then the final third part of main bucket I would put under the larger umbrella of responsible investment is impact investing. And this is when we are looking and measuring the social and environmental impact of our investment. So it’s very important that there is an output; that we’re able to actually measure that.
Okay. So, so how is this, then, integrated into the investment process and the decision that investment managers are making around investment? So is it a case where one of the investment managers is thinking of buying a particular company’s stock and they run into your office and they say, Melanie, is this one okay? Am I good to go on that? And you’ve got a list and you say, no. Or is it a little bit more complex than that or, or more layered?
A little bit more layered and different for each team. So all of our investment teams at GAM have their own investment process.
And they make their own decisions around this and they integrate ESG in a way that complements their process. And I’ll give you a couple of examples of what I mean by that.
Our emerging markets team has supply chain risk as a very big factor that they need to look at. And so this team doesn’t only just visit their holding companies, but they actually go out to the suppliers that supply their holding companies to assess what the risks look like on the ground there. Our Asian equity team has aggressive accounting as a very important factor that they need to consider.
And so it’s really important to them when they engage with companies that they have that trust with a company that the accounting is where it should be with a company. And then, of course, in Asia, board diversity is a little bit lagging right behind corporate best practices globally. And we have different challenges with small- and mid-cap companies in the U.S. where the ESG data just isn’t available yet. So each team has their own way of doing things. So they don’t have to run any of their decisions by my team or myself, the corporate governance and responsible investment team, but we support them. So if they’re interested in digging into, for example, wastewater management, then they need some help assessing what the companies’ disclosures are in this area, we’ll help them with that.
And so you indicated that Asia is lagging a little bit behind in some factors.
Where would you see the region of the world where there’s real leadership in that? Is it in North America? Or is it still Europe?
It is Europe, absolutely. And even within Europe, we’re seeing France is really leading on the regulatory front in this area.
Okay. And then North America would follow and Asia would be behind a little bit?
Probably, although Asia is getting, and particularly Japan, is getting more and more involved in this space, so that’s very interesting to see. Two weeks ago I was in Paris for the United Nations Principles for Responsible Investment annual conference. That was in Paris, and that was, you know, a very interesting place. Seventeen hundred people were there. It was a real great opportunity for everybody to come together. Next year it will be in Tokyo.
And so that’s fantastic. It’ll be in Asia and local representatives can come down there and come together to talk about all these issues.
So, this is something that is just being embraced all over the world—
—because in a lot of ways it makes sense.
Now, have you found it a challenge? Or what have been the challenges to get individual investment managers who are obviously focused on delivering results and returns for their investment clients, what’s been the challenge of getting them to embrace ESG to the extent you’d like them to? Or, has it been a challenge?
Yes. Absolutely it is a challenge for some people. Some people immediately, some of our investment teams, immediately understand that there’s a real opportunity here, but I think education is very helpful. We know that in the mid-1970s, studies have shown a company’s value was, you know, only 15% based on nonfinancial factors. So these are ESG factors, but the world’s changed. Now we’ve got social media. We have an immediate dissemination of information if a customer’s not happy. We have the internet. We have cybersecurity. And now the value of a company is over 80% based on nonfinancial factors, including ESG factors. And so, you know, it makes a lot of sense for portfolio managers to be considering this.
Yeah. And, and I was reading some of the materials that RBC Global Asset Management has put out relating to our ESG approach and it even goes so far as to show that even the mind-set of investors, particularly institutional investors, has moved to this idea that companies that do a better job along these lines do deliver better investment returns. So in other words, this isn’t a sacrifice that you’re making as an investor. This is actually a way to perhaps even enhance your returns, and more importantly, manage risk.
Absolutely. We put out a paper in the spring that was a summary of all the studies in this space—does SRI hurt returns? And the conclusion is no, it does not hurt returns. It’s harder to prove that it can enhance returns. This is where you’re sort of proving the counterfactual, if I hadn’t of invested this way, I would have made this decision. And so it’s a little bit more challenging to prove that, but intuitively, it makes sense. We know that companies that manage their E&S risks better do better financially. We do know that. So it makes sense if we’re invested in these companies, our portfolios would also do better.
So, a very well-known example of that, say, something like Volkswagen.
Right? Where if you were putting the proper screens, you’re evaluating that company, you’re hopefully going to identify the risks that are there, and perhaps underweight or avoid entirely something that ends up being a very bad reputational issue for the company and obviously hurts the performance of the stock and the company going forward.
Yes. Now Volkswagen’s an interesting case because there was, you know, deliberate hiding potentially of some of the conduct. And, you know, as investors we can’t know everything about a company. We can do the best we can with the information that the company discloses, but it’s not possible to always predict, you know, what’s going on at a company. But we can do the best. We can try our best.
So this is not going to catch fraud?
But it’s, it’s going to put a process in place that is more likely to ask the right questions to at least give the opportunity to identify those additional risks.
Yes. And ask a company, you know, how are you managing these things? What are your policies and procedures in place to address situations as they arise?
Okay. So, if you’re looking at RBC Global Asset Management right now, and I would say that you’d suggest we’ve done a very good job of embracing ESG and building it across all of the different mandates that are available to investors. What do you think are some of the next steps that we need to take to be the real leader in this space?
Well, I think that we have to continually challenge ourselves on what we’re doing and what our processes are. You know, all our teams integrate ESG, but there’s a spectrum. And, you know, I mentioned earlier that there are geographical, regional, and asset class differences in how various investment teams are integrating ESG. And we just have to keep looking at different tools, different technology, different research, and see if there are areas that we can push our processes even further because it really is a mind-set. The teams have to be believing in ESG integration and doing everything they can to keep pushing the needle forward in this space.
Yeah. And, again, I know you and just from this discussion I can feel the passion for the issue and for driving ESG into the processes at your firm. So, it’s something that I think a lot of investors are starting to become more conscious of, certainly institutional investors are, but your retail investor is really starting to become more aware of this and the positive that it can bring not only to the world, but to their portfolio as well. It’s not that trade-off that you think you have to make. You can invest in the right things and get a good return.
Absolutely. And we’re seeing as retail customers become more and more interested in this space, we’re really seeing it with women and millennials, which is a really interesting dynamic.
And, I know that our teams that are out talking to clients on a regular basis, we’re doing a lot of events, with women and younger people, because there are some differences in the way that these groups view investing. And it’s been a very successful program. We’re really proud of it. And it lines up with all the work that you and your team are doing. So, I think we’re 50 percent of the way through on this? Or where would you say we are on our journey?
Oh, well, I think the journey’s going to be going on for years because as these issues evolve, we’ve seen climate change come to the forefront in the last couple of years as a massive issue that we all need to address. So I think we’ve got quite a ways globally and in the industry to go, but I think we’re making some very good headway. I think right now, one of the most important things is education because there are different terms and there are acronyms and it can be a little bit confusing. And so education is really key so that everybody understands what’s available in this space and what we mean when we talk about some of these things.
Sure. And, to the podcast link we’ll attach all of the information that Melanie and her team have—all the research and surveys that they’ve done around this issue. So if you are interested in digging deeper, you can take a look at that material. I’d love to get you back on in the not too distant future to talk about climate change specifically and some of the things we were just talking about before we started taping. And so there’s some things evolving around climate change and the way climate change is integrated into this process. So maybe do a deep-dive on that, over the next few months if you’d be open to it.
Absolutely. That sounds great.
Okay. Melanie, thank you very much for joining us.
Thank you. It was my pleasure.
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