Investors Demanding ESG after the Pandemic

Corporate responsibility's a critical ingredient for sustainable - and enhanced - returns post-pandemic, says RBC Global Asset Management

Ruth Saldanha 10 November, 2020 | 4:28AM
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Ruth Saldanha: A recent RBC survey found that while ESG integration is growing globally, there is a geographic divide. Investors in Canada, Europe and Asia are embracing ESG integration as a way to both mitigate risk and drive alpha, while investors in the U.S. are moving in the opposite direction. The survey also found that the coronavirus pandemic has made 28% of investors place more emphasis on ESG consideration. What does this mean for ESG investing in the long run, especially from an asset manager's perspective? Melanie Adams, Head of Corporate Governance and Responsible Investment team at RBC GAM is here today to talk about this.

Melanie, thank you so much for being here today.

Melanie Adams: Thank you very much for having me. I'm happy to be here.

Saldanha: Well, COVID-19 has led 28% of investors to place more emphasis on ESG considerations. Do you see this continuing? And as this is a sizable number as an asset manager, how are you approaching general ESG integration?

Adams: Yes, absolutely. Well, you know, as an asset manager ESG integration and responsible investment is one of our top priorities. As a firm this is, you know, the tone is set at the top by our CEO, Damon Williams. We integrate ESG across all of our teams, all of our teams do it in a way that works for their process, whether it's, you know, because of the asset class that they're focused on or because of their specific investment process. But we do it, the reason we do it is that we believe ESG integration can enhance long term risk-adjusted returns. And so, that's why we do it, and that's why we do it across the firm. And you know, that makes intuitive sense, when you think that a material factor like water usage, that's not relevant for a bank, cybersecurity is relevant for a bank, maybe not so much for a beverage company, and so, that's how we do it.

We look at materiality across RBC GAM, we've certainly seen it, as you mentioned, in the pandemic, there have been a number of social factors that have come to the forefront, including employee health and safety. Cybersecurity, as everybody's working from home, and you know, if they have confidential information that they need to protect, as well as supply chain risks. So, all of those factors are really important for investment teams to be looking at as part of the investment process, but also for investment teams to be engaging with companies on meeting with the boards and management of companies and asking them how they're managing these risks.

Saldanha: The events of 2020 have shown that social factors are as much on investors' minds as are environmental or governance factors. As a global asset manager, how do you evaluate social risks and hedge for them?

Adams: Well, one of the most important ways that we can do this is through active stewardship. I just mentioned that we meet with the boards and management of companies, this is critical to really understand what they're thinking about these issues, how they're managing these risks. And it's also an opportunity for us to convey our views on what we think about their approach. And this has been particularly important throughout the pandemic, our investment teams have had hundreds of engagements with their holding companies, and the topics that they've really been focused on are business continuity planning, how our companies are managing throughout the pandemic, employee health and safety, what measures are put in place for companies that have workers that are still you know, going into premises. And, you know, supply chain risk has been another big factor, particularly for companies that are shipping materials across borders.

So, for example, if you think about the pharmaceutical industry, it's interesting, it's good to know and understand how they're getting their raw materials. And finally, I mentioned cybersecurity. That's one, initially, in the beginning of the pandemic, with everybody working from home, we needed to look at how people were assessing and accessing confidential customer information, for example, or sensitive corporate information and making sure that the company had the right protocols in place to ensure the security of that information.

Saldanha: Environmental factors are key for Canadian investors, especially given our reliance on oil and gas. What way forward do you see for this industry and Canadian investors in the space?

Adams: Yes, well, climate change is a concern for all sectors, all companies will be impacted. There are risks and opportunities, but it is not just the oil and gas sector, but everybody is going to be impacted from our transition to a low carbon economy. When we think about transition risks, these are the risks of keeping the temperature to a 2 degree world or 1.5 degree world. And what that means is transition rates are -- will there be litigation, will there be policy, will there be carbon pricing and how will companies be impacted by that? Secondly, there are physical risks, of course, which are if the temperatures increase, say to a 6 degree world, there will be more climate-related events, flooding and wildfires and companies will be impacted by those and in particular companies with more physical premises. So, think about the utilities company as an example.

And so, you know, from our perspective, RBC GAM climate is affecting everything. But certainly, the oil and gas sector is being directly impacted, there's no doubt about that, we are seeing that, we are engaging with companies. But I think it's really important to remember that we are going to be reliant on the energy sector and the oil and gas companies for many years to come. So, what we need to really be focusing on is engaging with these companies and working with them to transition to a low carbon economy and what that might look like for their companies. You know, it's the energy sector that has the expertise to help us transition to a low carbon economy. And so we need to engage with them and work with them to make sure that, that we're headed in that direction. And also, you know, as a final point, as consumers, we also need to be thinking about what we're doing in this transition to a low carbon economy, because that's a really critical part of the chain. And it's a really important part of the transition.

Saldanha: At a recent Morningstar executive forum, you mentioned that innovations and technical expertise that the Canadian oil and gas sector has, can and should be applied to other parts of the economy. Can you share some examples of how this might actually play out?

Adams: Yeah, absolutely. So engineering and operational expertise in that sector is being applied in other sectors, for example, large scale infrastructure, like laying fibre optic cables. There is an alliance, it's called Canada's Oil Sands Innovation Alliance, this was launched in 2012. It's an innovation and technology hub that that whose members are 13 Canadian oil and gas companies, they have shared over 900, I think the number is 936 different technologies, to find innovative solutions to reduce greenhouse gas emissions, to minimize land impact and waste and reduce water use and improve the management of tailings. So, there's been a lot of innovation happening in this particular sector.

You know, it's important to realize that Canadian oil sands have reduced GHG intensity per barrel by 25%, in the past decade. And so, this is something that, you know, some of the technologies can be applied across sectors, but certainly also in other regions and other countries who are also producers. And, I think the final point I would make on that is that Canadian companies spend about $1.4 billion a year on clean technology, and about 75% of that comes from the oil and gas sector. So, I think they're really important. They're a really important part really important component of this low carbon transition and how we're going to continue to work towards our goal.

Saldanha: Thank you so much for joining us here today, Melanie.

Adams: Thank you.

Saldanha: For Morningstar, I am Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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