Hello and welcome to The Download. I'm your host, Dave Richardson. And it's time to visit with our favorite neighbor, Melanie Adams, who is the managing director and head of responsible investing at RBC Global Asset Management. Melanie, great to see you. I see you wandering around the neighborhood. You're very health conscious, not like me. I'm driving past you normally when I see you. But we bumped into each other on the train a couple of weeks ago and started chatting and I realized that I hadn't had you on the podcast for a long time. And of course, what you do and what your team does is really important for investors. And perhaps for whatever reason, it's gone a little bit more to the back burner over the last year or so. But I think it's something that we always want to keep in the forefront because there's such a value to what you and the team do, not just from a responsible investing perspective, but just at the core of what investment management is, which is a lot of risk management. And any way you slice this, this is an important thing to take a look at as you're making your investment decisions.

Absolutely. It's great to be here, Dave. Thanks for having me on. It was fun running into you on the train. And I agree with you. It is about risk management. That's a big part of what it is and how the world has shifted and changed dramatically in the last year. How we think about responsible investment might have changed or how we think about some of the particular factors that we're looking at. But from that perspective of what is responsible investment, which is looking at specific environmental, social, and governance issues, and how they might impact investment decisions in the risk-return profile of an investment, it's still the same. It's just the factors might have changed, or how we're assessing them and thinking about them might have changed a little bit.

Yeah. And the process that you generally follow in terms of working with investment managers and looking at their portfolio or helping them use these tools to run more effective portfolios, is it a case where you're excluding companies or is it more about finding companies that do a better job than others? How do you mix that in around the decisions around the companies or debt, that you're taking on in a portfolio?

There are some elements where we're talking about exclusions in portfolios, and that has to do with some particular funds or some segregated mandates that we manage for clients. But actually what it is, it's a more holistic look at an environmental, social or governance factor, and assessing that as part of the overall investment process. Now, we work with the investment teams the same way we always have. We have a strong team, a responsible investment team with people in Vancouver, Minneapolis, Toronto, and London. And supporting all of our investment teams globally with respect to these factors. There may be some clients who choose to divest from particular sectors or particular product involvement categories, and we certainly can do that for our clients. We're happy to do that for them. But the larger picture of what we're doing is looking at these factors as part of the risk assessment of a portfolio. And actually not just risk, but opportunities as well, because there's a lot of opportunities in this space.

So what would be excluded from a fossil fuel free fund, Melanie?

We do have a fossil fuel free fund that we offer in Canada. It's as the name suggests, fossil fuels, but in that particular case, you're looking at direct involvement, and we have a 0% threshold for what we will allow.

I think the main point I was trying to make there in a silly way—because obviously I knew the answer, or I hope I did—but just the idea that when I'm out talking to investors for one reason or another, and it may be a specific sector or it may be a specific country—it's been more a country lately—that people want to avoid investing in that particular area or again, sector, that that option is there. The key is that you're providing lots of options. If someone does want to do that, they can. But in general, we want to use this across all of the portfolios, what you and your team does, because it's just another risk factor that you can manage within the portfolio, which is always what we want to do.

That's exactly right. And typically, when you do exclude from a portfolio, it's a revenue-based exclusion that you would look at. What does an issuer make and decide whether you want that excluded because it could be a slippery slope. You can have the upstream and downstream implications where the issuer sits in its value chain. And so you have to be really thoughtful about these kinds of things, because if you're not really careful in how you want to apply those types of exclusions, you can over-index in one way, and you could exclude things that actually can have some potential implications on the alpha that you're looking for from your portfolio. So generally speaking, the ones with exclusions are very small percentage of the assets that we manage. Typically, our clients don't want to have those types of exclusions, but what they want to have is just a more fulsome assessment of ESG as part of the overall investment process.

Yeah, my favorite example of it is, I've got two companies, they're in the same area. Say they're two banks, and one takes care of their employees really, really well. They survey their employees, they find out how they're feeling, they make adjustments, they act on things that employees voice as concerns. And there's another company that just doesn't even care. They're in the same business, but this one doesn't really care about their employees, just driving profits, just sell, sell, sell. And then you think of, okay, well, maybe in the short term, the more aggressive approach might work, but we all know where we would prefer to work long term, where we're happiest and where the best people are going to want to settle. And then that ultimately rolls up into the results of one company over another. And this is one of the ways that we can capture those things in using these screens.

Absolutely. Actually, you make a really good distinction there, Dave, which is the short term versus the long term. Typically, when you're looking at these factors, you are looking at them for a longer term. There are implications if you think about climate change. It's not going to play out in the next few months, although we are seeing more and more the weather-related effects of it. And we're seeing companies grapple with that as part of their risk management. But typically, you are looking at a longer-term time frame, which is generally how our clients are investing, with that longer-term time frame in mind.

And just for those of you who want a more detailed dig into the basics of responsible investing, Melanie has appeared before. You can get all of our previous episodes, including all of Melanie's appearances, just by following or subscribing to the podcast wherever you get your podcast or subscribing on YouTube. Because we're on YouTube now. That great backdrop that you've got set up in your office is on YouTube for the kids to watch.

I was surprised, actually. I thought this was going to be audio only today. So this was an exciting development for me.

Very exciting. People are watching. So again, we'd love you to subscribe and watch. I think there's a way that you can delete my box so you don't have to look at me, but you can see the guests, and that's a better thing. So, Melanie, your team is always working, always crunching away on stuff. One of the things that you put out is you got a newsletter. Is that newsletter available to everyone or is it just available to people inside of RBC Global Asset Management?

It is an internal newsletter that we put out. However, the best ones, we typically turn into some type of a thought piece that we make external for our clients. And the one that we have done recently on the trends to look out for in 2026, we will turn that into an external thought piece.

So at this point, this is an exclusive scoop on the Download podcast. You're getting to hear this first. These are the details of the key themes in responsible investing for 2026, right now only available internally, but we're going to share them here. So as we start, the big one is what we've talked about with a lot of the investment managers, and it's on the mind of any investor that I'm out talking to these days, and that's artificial intelligence and where it just continues to move forward. And so from that angle, from the angle of responsible investing, why have you categorized that as a significant trend for the year?

It's absolutely a huge trend. Now, there's two ways to think about artificial intelligence in this space. One is for us and our AI team. It's impacting us the same way it's impacting everybody else. We're looking to use it to improve efficiencies. We're looking to use it to do company assessments. For example, looking at a climate transition plan that an issuer puts out and assessing it and seeing if we have any gaps that we'd like to speak to the issuer about. We're looking at it in proxy voting and how it can be used in our proxy votes. I know that there was a big news release out a few weeks ago about the use of AI as part of the proxy voting process. Right now, we look at every single valid item. We do our own assessment on all of the issuers and all of the items that come up at the annual general meetings. And we do that analysis within the responsible investment team, but working together with the investment teams, deciding how we're going to vote. Now, there are going to be ways to make this more efficient using AI. But we need to be really careful that we find the right balance there because our human brain assessment over this right now is really important. There's a lot of nuances in this. And so that's the one side. It's the efficiencies and it's the alpha generation that we can think about. But there's also AI from the ESG and the risk management lens. And this is a little bit different because this is how we're looking at companies and how they're thinking about AI and the implications for the issuers. It has to do with energy that's used for data centers for AI. That's a big deal. The water usage that goes into that. It has to do with human capital and how companies are thinking about their workforces, how they're thinking about changes that are coming their way. And then it also has the governance component to it and how boards should be structuring themselves and overseeing these AI risks and opportunities that they have. And so it really spans across all of the E, the S, and the G in how we're looking at our issuers. But also, of course, we have to challenge ourselves. And that's actually one of my New Year's resolutions is every day I'm trying to use AI a little bit more. I have very, very gifted people on my team using AI, and they've come up with some phenomenal creative ways to thinking about this. I'm a little bit behind myself, so I'm trying to upscale in this area.

And yeah, Melanie, I think that's something we all could do this year. I know I'm trying to spend some more time doing that myself. In the world that's coming, or in many ways is already here, it's so important to keep up. Just as you had to get familiar with softwares and computers and all that, which weren't really around when I started my career. I know for you, that was not an issue. But the interesting thing about AI—I was talking to Eric Lasselles about this last week—you're starting to see it, some of the employment data that we're getting in terms of companies maybe not replacing people who leave, not hiring as fast. I think that's one of the areas that's going to be really interesting. And then looking at companies and how they manage that.

Yeah. How they stay ahead, how they remain competitive, because if their competitors are doing it and they're not, that's not going to play out well from a risk-return profile perspective over the long run. Thinking about that. And there's employment issues that go along with that as well, and that we need to be very mindful of and making sure that that's all being handled. There's appropriate governance over that in the issuers. There's a lot to it. It's very multifaceted.

Yeah. And I think for individuals managing their investment portfolio, it's one that's really hard to get at. And I think that's one of the advantages that you and the team have with the relationships that some of the investment managers have with the companies they work with is that you get that direct contact with the companies to develop an understanding and comfort or discomfort with the way that they're adding AI to how they run their business.

Yeah, and that's one of the big advantages we have. And as one of the largest investors in Canada, we have tremendous access and relationships with the companies in which we're invested. And we meet with boards and senior management and have the opportunity to ask them these kinds of questions and how they're thinking about this. And that type of active stewardship is a really important part all year round. Now, during proxy voting season, we have a lot more opportunity. And this becomes a really big part of it because we're talking to companies about the shareholder proposals that are on their ballots and how they're thinking about them. And so we have particular items that we want to focus on, but it goes around year-round. We're talking to the companies about all of these issues.

Yeah. It's one of the things that an investment manager over an individual investor can find is they're able to identify a broader range of risks, and it's the risk that you don't account for that's sometimes the one that gets you. And that's what's so great about the work that you and the team do. And it's really interesting that, again, AI is on the top of everybody's list in terms of what to invest in, how it's affecting the investment environment if you're an investment manager. And it's great to see it as at the top of your list and what your team is looking at.

Yeah, absolutely. And it will be. I mean, it's the biggest topic right now in the space. That's why it's our number one trend to be on the lookout for. And we're just constantly challenging ourselves to use it more often, to be looking at it more often, to be thinking differently about it.

And maybe in a different direction, the second on the list is recalibrating defense. Obviously in the world we're living in right now and the changes that have come just over the last few years, coming out of COVID, this is more on the front burner. So what are you looking at in that space?

This is a big change. This is a big area, and particularly we're seeing a lot of change in Europe. This type of investment is happening globally. But in the responsible investment space in Europe, historically, the defense sector was one that would often be screened out of or divestments would be made from in the sector because they were considered to be maybe not ESG friendly, not social friendly, maybe potential implications on human rights and how weapons are being used. And so often we would see in Europe exclusions related to weapons. And now what we're seeing actually is Europe pulling back a little bit from that, and not just European clients, but European regulators, where they're coming up with specific categories of weapons. There's a prohibited category of weapons, which includes cluster munitions, landmines, biological and chemical weapons. And then everything else is not in that prohibited sphere, but there are different categories of how controversial those weapons might be. But there's a little bit of a pullback from this type of divestment in the space. And even in most strict clients that we've seen, they're starting to say, well, actually, there's implications here on sovereignty. There's implications here on human rights if we divest, if we don't have proper defense in play. And so there is definitely a shift in that space. And there's also an opportunity. People don't want to be left out of some of these investment opportunities. They want to make sure that they're thinking holistically about the long-term implications of it from the ESG lens, and that they're also doing what's best for their beneficiaries.

Yeah. And if you just look at Europe in your example, we've talked to Dave Lambert recently who manages European portfolios, and defense stocks were among the best performers last year in Europe. And if you had an exclusion for that or you didn't have a framework for deciding which companies were the right ones to invest in or not, you were going to miss an opportunity.

Absolutely. And added to that, though, as well is the complexity of the European regulations where each country in Europe might have their own particular rules about it. Italy is an example that comes to mind where they have specific prohibitions against a category of weapons that's broader than anywhere else. And it is a strict prohibition. For all of our funds or mandates that we offer in Italy, we need to make sure that we are in compliance with that rule, and it is broader. And so Europe, I think it's got a lot to sort out in terms of how it's going to be thinking about these types of exclusions. Of course, for our European clients, we're making sure that we're in full compliance with all these different countries. But it's a good conversation to have. And we do have access to a lot of data points and a lot of resources on the defense industry, what companies, what issuers, their level of involvement with various categories of weapons, then we can make that available to our clients or have those discussions with our clients.

It's just another example of the depth that you go into in this space. It's just remarkable watching you and your team in the role, the depth of what you've built. And then, keep emphasizing the importance in terms of how it links into the portfolios that people are investing in.

Yeah, absolutely.

So speaking of that, the voice of the shareholder. That's the next on your list. So what's your focus there in 2026?

So this is a US one. The voice of the shareholder is important globally, but we've talked about Europe, we've talked about how defense is important globally but as a particular European lens. This has a particular US lens. And what we've seen in terms of the voice of the shareholder is some more restrictions, some prohibition, but a lot of activity and regulation in the space of when shareholders have the opportunity to vote their proxies, how they're voting it, the ability of shareholders specifically to put shareholder proposals on the ballots of companies at the annual general meeting. It used to be that the SEC would opine on these. Companies now have a longer leash to not put these shareholder proposals on. And so we don't have an opportunity to vote on certain things because they're not even making it on the ballot to start with. And so that's a big deal. And we've seen a lot of questions around investors, when they join collaborative engagement type organizations and what that means and how they're using their power and their leverage. And so there's been a lot of activity in this space in the US. Active stewardship is incredibly important for us. Voting our proxies in the way that we view to be in the best interests of our clients is really important. And we're always advocating for shareholder rights to make sure we have a say, to make sure that we're able to make our views known to management. So that's going to be continuing for a long time. I mean, that's a fundamental. That's a core principle of governance. It's a core principle of how we execute on our fiduciary duty to our clients. And so we just have to stay on top of these developments and make sure that we are advocating for the best interests of our clients here.

Yeah, absolutely. I love it when I talk to you because that's always the focus. It's the client. The end client, the end investor, all of these are things that are designed to deliver better outcomes for everyday investors who are investing in your portfolios.

Yeah. And it's these little things, too. I mean, it might not hit the radar of everybody that this is happening, that we're losing the right to potentially have a say and to be able to vote on certain shareholder proposals. But we are out there. It hasn't slipped off our radar because this is our job. This is why we come to work to do every day. And so we are doing this on behalf of clients who might not have the access or the voice to be able to do that.

And then next one, one that I think is often linked to what you and the team does, and I think even more so in the past—it seems to be a little quieter, we talked about this on the train—and that's climate change. And your point for 2026 is the acceleration of climate adaptation. And is that taking the way we think about climate change in a different direction? Or is it still the same, but we're just seeing acceleration in some of the trends? Why is that on the list?

Adaptation is a little bit different from if you look at transition or you look at resilience and how we're thinking about getting ready for climate change. What adaptation is saying is, this is already happening. We're already starting to see some of the impacts on the weather, for example, being an easy one. So we are seeing this. So how are we adapting? And how are companies that we're invested in adapting because it's already happening? We still want to talk about transition. We still want to talk about, can we bring down our emissions? Can we think about climate and how are we managing these risks? But we also need to start talking more urgently about what are we doing now to actually protect because it's already happening. And we see this more actually in the physical asset. So we're talking about companies that have physical assets or are located in certain areas, like near water or near wildfire risk areas. This is where we're going to start to see the big changes happening first. And so for us, it's about understanding how they're thinking about this, what they're doing to adapt and be prepared.

Yeah. Well, a lot of Eastern Canadians and Central Canadians in the Toronto area that have homes in Florida. And one of the things I hear from people who have those homes down there is how much their insurance rates have gone up in recent years. And that is largely a reflection of climate change.

Absolutely. That's an important topic for us to talk to companies about what type of insurance do they have for their assets. How are they thinking about this and protecting themselves?

Yeah. It really is just amazing the scope and depth of what you have to do to just identify all these risks that are out there. So a couple of other points which maybe we'll leave for the thought paper, because you've got a little bit on human rights and some other areas of investment as the last two. But I think the first four that we've had a chance to cover, as I said, cover a wide scope, a lot of depth. And I don't know that the average investor thinks about these things when they're going to buy an individual stock or even is worried about these things or realizes that someone's behind the scenes if they buy a particular fund or ETF, that someone is there in the background watching these things and adjusting what they're watching and evolving what they're adjusting over time to keep up with everything that's going on in this world that moves faster than it ever has before.

Yeah, absolutely. And it's broad. If you think about all the environmental factors and all the different social factors and governance, it's impossible for one person to become an expert in all of these categories. But having a broad team with a range of expertise, working together with the risk team, with the investment teams who work very closely with our investment policy team as well, I think that's where the strength really comes in and gives us a good advantage here as a large asset manager.

Yeah, well, Melanie, again, it was great to bump into you. I'd say the climate on that day was not favorable. It was super cold.

Yeah, lots of snow we're definitely getting this year.

Definitely. But it was great to catch up. And I'm glad I had you on because, again, for whatever reason, there's an ebb and flow to interest in this topic. And we've had periods where it's just been right at the top of the list and it's on the tip of every investor's tongue when I'm out talking to people—and I'm always out talking to investors and advisors. And it just slipped back a little bit. And I thought it was really important to bring it to the front burner. And again, just see how you're continuously evolving what you're doing to make sure that it continues to add lots of value. So whether people are paying attention or not, it is there in the background, and it's doing good stuff for people who are investing in your funds. And it's an added value and thing that people should be thinking about when they're making their own investment decisions.

Yeah, absolutely. We have not lost any momentum in this space. We have not pulled back at all, even though it may not be top of mind for everybody else. We're continuing to think about it. And I'm really proud of the thoughtful, innovative approach we have here. So we're happy to be able to do this for our clients.

Yeah, you do a phenomenal job, and I did catch that. As we were chatting on the train, the passion hasn't wavered one little bit from the first time I met you. And that's critical because, again, you want to have someone doing this and you want to have a team of people doing this who are passionate about it and understand the impact that it can have. And that's certainly you and your team. So it's great to reconnect.

Thank you. Thanks so much for having me, Dave. I always enjoy being on your podcast.

We'll have you back soon.