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About this podcast

This episode, Melanie Adams, Vice President and Head, Corporate Governance and Responsible Investment, discusses the top ESG-related themes in 2021, from employee health and safety, to diversity and inclusion and environmental issues. Melanie also talks about the importance of engaging with companies to evaluate ESG risks and opportunities in how they operate. [14 minutes, 47 seconds] (Recorded November 23, 2021)

Transcript

Hello, and welcome to The Download. I'm your host, Dave Richardson, and I’m very pleased to be joined for the first time in a while— we probably should have her back more often because it's such an important topic— by Melanie Adams, who is the VP and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management. Melanie, thanks for coming back.

Thanks very much for having me. I'm really happy to be here.

Did we do something to scare you away last time? Because we really should have you here more often. This is such an important topic.

I come whenever you invite me.

Okay, well, we're going to invite you more often. And hopefully for those of you who didn't listen to the first couple of podcasts that we’ve taped with Melanie, a year or a year and a half ago, there's some great background information about responsible investing and the philosophy that she uses in guiding the responsible investment program at RBC Global Asset Management. But, Melanie, why don't we get an update? What are some of the trends you're seeing emerging in this space as we finish off 2021 and move into 2022?

I think that there's three. If I could group the trends that we're seeing, I would group them into three broad buckets. The first being employee health and safety. We are coming out of the pandemic, but we're not out of it yet. And so, it's really important to see how companies are thinking about employee health and safety, the lessons they've learned throughout the pandemic, what measures they are putting in place as we move forward so that we can hopefully continue this economic rebuild as we come out of the pandemic. So that would probably be one of the most important areas. The second area is diversity and inclusion. This also continues to be a really important area of focus. We've seen a lot of global activity in this space, and what we're interested in is how companies are thinking about diversity and inclusion. What are their policies, their procedures, with their pay equity structures? How does that look? What is the oversight from the board? What are their actual statistics and measures? And that will continue, especially as we get more and more data from companies on what their diversity measures are. So I expect we'll continue to see that as a really important trend. The final trend— and this is a big one— is the environment. There are so many different areas that fall under this. Biodiversity is a huge issue. Nature-based solutions are becoming increasingly important, and climate change, just in general, is really important. We just came out of COP26 in November. We saw some movement there, some commitments from the various governments globally on how they're going to move ahead on climate change issues, but it's also something we see in the papers every single day. It's affecting companies; they have opportunities and they have big risks. As investors, we want to understand what they are and how these companies are thinking about them.

Melanie, you obviously have a huge role with a very large investment manager, particularly in a Canadian setting. Are you really seeing big investment managers around the world with the capital that they ultimately deploy on behalf of their investors, are you seeing the embracing of these ideas that you would like to see at this point, or is there still a lot of work that needs to be done?

That's a really good question. I would say yes, we are seeing the embracing of these ideas in ESG in general. We've seen it from global asset managers, and in fact, we just had our fifth annual investor survey come out, and the results show that globally ESG integration is top of mind for all investors globally. But we are seeing that as a member of numerous organizations. We’re signatory to the PRI, the Responsible Association of Canada; I'm the vice chair there. We're ICGN, and it's sort of an alphabet soup, and I can go through a whole bunch of different affiliations where we're a member, but effectively, what we're seeing is investors coming together, talking about these issues with each other. This is an area where we can work quite well alongside each other, to make change, to advocate, for companies, to make improved ESG disclosures and advocate with regulators and policy makers. So certainly, there is definitely a lot of movement, a lot of momentum in that regard. Are we where we should be? I think in many areas, yes, we are. I think that what we need to see going forward, though, is continued nuanced conversation. This is a very tricky area. It's an area where there can be a lot of value-based conversations, a lot of slippery slope areas that we need to be really careful and continue to have these really thoughtful nuanced conversations. It's certainly an area where there's a lot of room for real expertise. So, for example, I'm thinking about in the climate area, having scientists, having people with climate expertise is really important to these conversations.

Well, you'll be glad to know that this podcast is the Canadian home of nuanced conversation. So you're in the right spot as a guest here. I think a lot of people get fogged down when they think about responsible investing or ESG on the environment piece. It was really interesting as you went through your top three; employee health and safety, in the midst of a pandemic, and obviously, an interesting concern, diversity and inclusion, lots of talk about that, particularly over the last couple of years. This is something that, as an active shareholder, you can get engaged with companies and actually influence what they're doing. Can you talk a little bit about how that process works and why you believe it's so important to engage with companies?

Yes, absolutely. Well, when we are shareholders of a company, we have the opportunity to sit down with senior management, to sit down with the boards of directors and talk about how they're thinking about the various risks and opportunities that face their company, whether it be diversity, employee health and safety or climate, any issue ESG related or otherwise. But it's an opportunity for us to hear from them how they're thinking about this. But it's also an opportunity for us to let them know what our views are as a shareholder and whether we think that they're headed in a particular direction. Now, I will caveat that and say we are not management of the company. We don't take on the role of suggesting that we know more than management does about this. But we do. We can see some trends, and we can suggest, really, that they need to make more disclosure around what they're doing on the ESG front. And once the company makes that disclosure and we understand what they're doing with these risks and opportunities that they face, then we can make an investment decision based on that information. That's why engagement is so powerful. There's often a lot of conversation about engagement or divestment, especially in the ESG space and in the climate change and the fossil fuel landscapes. Do you engage or do you divest? Our firm position— the firm’s position but also our firm position—, is that engagement is more powerful. We need these companies to be part of the transition that we're going to need to see to get to a net zero economy. We want to be at the table with these companies talking about what their strategy is, how they're going to transition, how they're going to see us through our energy needs into a net zero economy. And so that's why we believe engagement is important. Divestment is always available, but for us, engagement is the most important first step.

I think sometimes people think of engagement, particularly if you're looking at the asset management arm of RBC, which is the largest financial institution in Canada, that it's the big bank coming in with a stick and enforcing and trying to direct the company around how they proceed in this area. That's not it at all. I think you sort of alluded to it, but it's really a conversation, right? You're working with them and you're bringing ideas to the table. They've got ideas, and it's about trying to find the best solution for everyone, including the communities that these companies operate of?

Absolutely. It's always a dialogue and that's our approach. Our approach is very collegial with these companies. We're invested in them. We want them to succeed. And at the end of the day, ultimately, their financial success is in our client’s best interests. So, we're not going in there with a heavy stick to beat on the companies that we're invested in. We're going in there to say, how can we help make your company more profitable in the long run? How can you help us make the investment decisions we need to make so that we can act in the best interest of our clients?

It sounds like it's the right way to do things, that it's a very high value process for everyone involved, and I know that's your philosophy. Let's dig into climate and climate change, and that's what's been in the news lately. I think that discussion will allow to give an insight into the process that you follow with portfolio managers, for example, to make sure that we're following through on the commitments that we make in terms of putting these ideas and issues front and center, from an investment management perspective. What do you see are some of the key issues around climate change that you would like to see addressed through putting proper metrics and measures in place within your firm?

I'll start out with what we rolled out in 2020. We first started by rolling out our approach to climate change. We set out how we were going to think about this. We purchased climate data. So these are the climate metrics, and Dave you spoke of these a little bit, but they include GHG emissions, they include transition risk, physical risk facing the companies. I will say the data is not perfect on climate right now, especially in the fixed income space. We don't have emissions coverage yet that we would like to see, but it is progressing. It's progressing, actually quite rapidly. So we're seeing a lot of movement on this front. But what we do is, on a quarterly basis, we run over 100 of our core portfolios through a climate scenario analysis. So we look at the GHG emissions (scope one, scope two and scope three) of the whole portfolio. We look at the green investment. We look at fossil fuel investments. We look at the physical risk exposure— when temperatures are to increase to a certain threshold and there's a risk of more flooding or wildfire, what are the companies in that portfolio that might be vulnerable? We look at transition risks— if there's carbon pricing, if there's policy reform, what companies in the portfolio could be more vulnerable to that. We look at what companies have patents for climate related technologies. That's part of that analysis. We also look at temperature alignment. What this means is, if your portfolio represented the world, the globe, what temperature increase are we on? So your portfolio might have a 3 degree temperature alignment or 1.5 degree temperature alignment. So that's what that metric means. We run these for our investment teams quarterly, and then we sit down with the investment teams and we go through them, answer any questions. There's a lot of education around this, and the investment teams take this, and they think about it as part of their investment process and integrating this. They also use them when they're engaging with companies to talk about what risks and opportunities that that client faces. Based on this quarterly analysis, which we continue to evolve, actually, we're adding metrics and taking metrics away. It's a continual process. What do we find helpful? What don't we find helpful? But last April, we released our first TCFD report, passport on climate related financial disclosures. It's a long acronym. It talks about our portfolios overall, and it’s just very transparent with where we are in our portfolios, and we disclose a number of metrics in that particular report. Then one final item that I'd really like to mention, which is just this past October, we released our net-zero ambition statement. So this is net zero carbon emissions. What we're looking for: the companies that we're invested in and for which the climate is a material risk, we expect them to have a net zero target and strategy in place to get there. If they don't, we will engage with them on this. But we are really committed to measuring, monitoring, and disclosing these climate related metrics in our portfolios for our clients.

Again, this is not just sort of a pie in the sky where you put your finger up in the wind. You've shown me some of the reporting that you use. These are detailed metrics, as you say, along a number of different fronts that are evaluating individual investment mandates and more broadly, portfolios, to make sure that you're moving in the right direction towards your objectives. Correct?

Absolutely. They're about 17 pages now. So we are trying to streamline them a little bit, but that's the ongoing evolution that we're going through. What are the important metrics? Are there metrics that we're missing? What does this mean for us? It's a process. So it's a lot of education. I think we're all in this journey together

The responsible investment survey that you referenced earlier, and a lot of this information is included on the RBC Global Asset Management website. I know you're doing a lot more work in terms of making sure that this information is public, very easy to access. And so it's all there, is it not?

It is, absolutely. Please check out our website. Our TCFD report is there and our ambition statement is there. Our investor's survey is on the website. We keep it up to date as well with any thought pieces that are put out from the corporate governance responsible investment team or any of the investment teams on this space. So there's a lot of information there to take in.

Excellent. Well, Melanie, once again, we'll have to have you back more often because this is a really fast moving and interesting and important area. I think for most investors this is a really important factor in their investment decision. So we'll have to get you back more often to keep us up to date on what's going on in the space.

Absolutely. I'm happy to come back anytime, Dave.

All right. Thanks Melanie.

Thank you.

Disclosure

Recorded: November 23, 2021

RBC Global Asset Management is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

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