Transcript
Hello and welcome to the Download. I'm your host, Dave Richardson, and I thought it would be a good time to have our guest because we live in the same neighborhood. I mean, I could literally hit a golf ball into her backyard. But the only time I've seen her in the last six months was in England, when we were in London, in the UK together. So I thought it would be a good chance to catch up and see our good friend Melanie Adams. Melanie is responsible for policy around ESG — environment, social and governance investing — at RBC Global Asset Management. Is there a better way of describing your role, for those listeners who are in here for the first time, getting a chance to hear from you?
Thanks, Dave, for having me. I'm really happy to be here as usual. I'm head of the responsible investment team at GAM. We are seventeen people. We are a global team, and our role is to support the investment teams and the firm generally on environmental, social and governance issues.
And so, Melanie, I think we had you on about six or eight months ago, and there's a lot going on in the space, as there always is, because it's a very important one. It's been in the news a little bit, sometimes for the right reasons, sometimes maybe, I'm sure you'd argue, for the wrong reasons. But what in general is happening in the space right now that listeners would be interested in?
There's a lot going on in this space right now, Dave. I would probably bucket it into three main areas just for ease of working our way through them. One is the continued increase in regulation. It started when we saw a number of regulations coming out in Europe, both for companies and how they're disclosing their ESG issues, but also for asset managers and how we're disclosing different metrics. We have recently seen some new regulation out in Canada from the securities administrators here about disclosure related to funds and how funds are integrating ESG considerations. And so we're working through those right now, as are all of our peers in this area, making sure that we have full, plain and true disclosure through all of our documents. So that's on the regulation side. What we also have, the second area that I would largely cover, is this ESG backlash that we've seen in the US. It's growing. It does seem to have legs of its own right now. We're seeing it in a lot of different areas, whether it's the antitrust area, whether it's the boycott; in different sectors area. And it's being used as a political wedge issue. And in my view, it's a bit of a misunderstanding about what ESG integration is and what it means. And so there's a lot of education that's needed in that space. But I do think in this election year in the US, we're just going to see more of it. And as a wedge issue, it's getting a lot of airtime. And then I think the third area, I would say, has always been there. These are some of the thematic ESG areas we have seen for a long time. We've known that climate change is a systemic risk. It's something that we need to look at. We are seeing more climate events globally and we're also seeing a lot of human rights issues globally as well, which has become a topic of a lot of discussion in the investor community and how we're assessing these types of risks.
So great summary, as always. Concise, articulate. That's why we love you as a guest. Let's go to the first one, the regulatory, and I guess the general view there would be, this is not going away. This is something that is ongoing and really a big part of the role that you play in your seat to track what's happening from a regulatory perspective and keep up with the compliance, following those regulations within the firm and being aware of how that's affecting investment decisions, the way companies are being managed all around the world.
Yeah, and that's actually a great point that you're making there, Dave, when you say how companies are managed all around the world. One of the biggest developments has been the International Sustainability Standards Board. The acronym is ISSB, which you see often. This is part of IFRS. So this is our accounting standards setters globally for all, except for the US, which uses US GAAP. But they are putting out standards now for companies to report ESG metrics in line with these particular standards. And so what's happening now is globally, regions such as Canada are assessing these and determining whether or not we should actually bring them in as part of our legal requirements for corporate reporting. So that's a very interesting development in the space. And as investors, we're really happy about this because we want standardized reporting from companies. So that's a very exciting development. And then in the other space, just in the regulations, is we do continue to see from Europe very prescriptive reporting requirements where we need to, as asset managers, report on very specific ESG metrics for our clients. Whether our clients want it or not, we put the information out there. Canada does still tend to align a little bit with the US in terms of the philosophy around reporting, which is: we're not going to tell you exactly what to report; you can do it, but you need to be as full, clear, transparent, plain. I think «full, plain, transparent disclosure» is actually the legal words that they use. So as long as you say what you're doing, you can do it. As long as your investors understand and you're very clear about it, then that's what's really important.
Yeah. And I think one of the key things to take out of that as an investor. So you may place ESG and responsible investing at or near the top of what drives your investment decision, or you might say, I don't care about this at all. But either way, you should recognize that because of the direction that regulatory is going — and then we talk about some of the thematic pieces — that you want to, as an investor, understand all of the risks you're undertaking by making a particular investment. And if you're ignoring this, you are ignoring a very important element of making an investment decision. So we have to care about this. Again, whether I'm hardcore, I absolutely insist on this as something that's important to which asset manager I choose to manage my money, or if I'm not that worried about it from a personal standpoint, I mean.
Exactly. And you can just look to a number of events, current events in the media; if you are a healthcare provider, if you have access to client information, it's important to understand the policies, the cybersecurity protocols that have been put in place to protect that information, because that is a huge risk for that company if there are not robust policies and procedures around that. And as investors, we want to know that. We want to understand that. We've seen some regulatory fines come down recently against companies. And so, understanding how they're being addressed, what is the type of culture at these organizations? How are they thinking about these kinds of issues are really important. We often talk about climate issues or nature related issues, water issues. If you're a beverage company and there are water issues, how are you going to do that? That's critical for the success of that company. And so looking at these types of issues are really important. The tech companies; there's a lot of issues around the tech companies and this is a fast moving space right now, and so understanding how these companies are thinking about these social issues. Thinking about some of the workplace health and safety was a big issue, for example, during the pandemic. So how are these companies addressing them that is going to be really important for our portfolio performance?
Yeah, absolutely. Because as investors, we're trying to maximize our return for a given level of risk. If we don't understand at the core all of the risks that we're taking in any given investment, then we're missing a big part of the picture. And that's really, I guess, at the core of what's misunderstood within this ESG backlash that we're seeing in some areas of the US.
Yeah, absolutely.
So why don't you talk about that. Is that making your role more challenging, or is it something that you think of as mostly noise in an election year? How is this backlash affecting the way you and your team have been operating the last several months?
It's not business as usual. Certainly not. We are paying close attention to it. We have a great business in the US, and we want to make sure that we're always compliant. So there's a lot of education that's taking place down in the US, understanding what are the different positions, what are the concerns, what do our clients want, what are they looking for in the US, so that we're able to fully meet their expectations. So that's all being more work, as well as making sure that we're staying on top of what the news is and what's unfolding in the US now. We've always positioned ourselves. We've always been very clear, in my view — maybe I have a bias, I'm sure I do here — but we've always tried to be really transparent about what we're trying to achieve. Why we do it. That it is connected to risk and return. That's why we do it. Not because we have a particular moral view that we're taking on something, but because we're doing this in our client’s best interests. And so it's really getting that message out and being really clear about that. But that's not new. That's always been probably the biggest challenge in this space, the education and explaining and making sure that people understand why we're doing this. Of course, we do have some clients that do have particular requirements as part of their mandate. And so we'll talk with those clients and understand what those are so that we can meet them as best as we can.
But the idea is lots of transparency, lots of information, using measures that we can show to customers, to show to potential investors. And then the customer makes the decision on how they want to use that information, whether, again, they're going to look for a particular investment that excludes certain areas of the market or they're going just use it as part of the general assessment of risk of that particular investment vehicle and move forward. It's about transparency and giving investors information so that they can make better decisions. The decision they make is up to them. And the role of the investment managers is to provide a choice for lots of different customers. And I think that's generally the philosophy that you and the team follow, correct?
Absolutely. And as part of that as well, Dave, is the active stewardship. It's often called active stewardship. And what that really means is engaging with the companies, voting our shares in a certain way. But a really important component of it is when we meet with the boards and management of companies, and we understand how they're thinking about these risks. And opportunities too, because it's not just about risks, there are opportunities in this space. And taking that information in and making it part of the investment decision.
Yeah, and as we say, that's not necessarily agreed to by everyone, but the idea that you invest in the companies and that gives you a seat at the table to at least have discussions about that. Now, again, you're not directing the company exactly what to do, but you're pointing out things that they should be thinking about in their business to manage risk more effectively, or risks that they may not even be seeing to get the business results that they're looking for over the long term. And the philosophy of being at the table versus not investing in the company at all, they're two different philosophies. I think from your experience, clearly having the seat at the table is much more valuable than just not being there at all.
Absolutely. And we don't ever think that we should be management of a company. We don't ever think we're better positioned than the management of the company to manage its affairs. We're not telling a company, you should do this, or you should do that, but what we're really trying to do is better understand how the company itself is thinking about these types of risks. Sometimes we're asking them for more disclosure to make what they are doing more publicly available for everybody. And in some cases, we are trying to make some suggestions that maybe there's some risks that that they should better account for, but we don't view it as our role to tell them how to do that.
II won't tell you to do it, but I do have this fancy gadget that we put in our house to manage the bad water in our neighborhood. So if you're interested in that, I can tell you that offline. But you can probably tell; the listeners can't see my hair, but my hair is beautiful right now because of this water device. And I'm making better coffee as well. So it helps you on that front? It's absolutely win-win. Cheap device, too, and easy to install. So, thematically, what are you dealing with there, and how's that impacting you and the team?
Thematically, you mean, just in general?
The risks. We're seeing some of these climate risks that have been talked about for a long time, starting to play out and have an impact in different industries.
Yeah. And I think one good thing that's always good to mention is that we do have some climate expertise on the team. So we have those insights in house that we can use to support the investment teams and their analysis. And I think a really big issue that's coming is human rights. And so we have been very actively building our skill set in that particular space. It's a very challenging area in some ways, as investors, to understand how these risks can impact performance, and where are they, and do we have enough disclosure from companies on them? And so that's a really big focus area for us right now as well.
With any human rights issue, or in many human rights issues, there's two sides to the story. There's some people vehemently supportive on one side and another group vehemently supportive of the other side. And how do you think about that in terms of managing risk within a company or a potential investment?
It's the same in actually all kinds of ESG issues. There are always two sides to every story. It's the same on climate, it's the same on human rights. There are always different elements that we need to think about. A big part of that is research, due diligence, listening, learning and understanding how, as investors, we can use the information that we've learned to best meet the requirements of our clients. We're not solving a lot of the issues ourselves, but what we're doing is investing on behalf of our clients to maximize their returns. It's within that lens that we need to be thinking about all of these issues. It's really important to get all the information that we can. There's a lot of resources out there right now for ESG data, for insights. There's a lot of research available that we subscribe to. We're tapped into getting all of that and to make those kinds of assessments and getting it in the hands of all of our investment teams.
I keep coming back to this word over and over again, the idea of transparency. Once we have a view or we're making a particular decision in one direction or another, that everyone is aware of it. You can make the choice as an individual investor, whether you're going to go ahead with that investment or say, that's not for me, I'm going to pass, I'm going to look elsewhere. But as long as you know what you're investing in and that the risks have been measured and the appropriate decision has been made for that particular portfolio, you have the choice in your hands and know exactly what you're doing.
And a really important part of that is that we might be invested in a company that somebody might look at and say, wow, that company's got a lot of ESG risks. Why is an asset manager that considers ESG factors invested in this company? Well, it's part of the process. It's ESG integration. It's not remove every company that has ESG risks. Why we might be holding it? There could be a variety of different reasons why we might be holding it, but generally it's because we think that these ESG risks have been priced in. We think that the company is turning things around and there is a potential upside for the client, that the company starts to manage these risks, starts on that journey, and it's going to improve and it's probably going to have a good outcome for our clients, and that's why we would be invested.
And then again, once you are invested, you're at the table to make sure that the company is moving in the right direction on some of these issues, that you're there to monitor and make sure that they continue along that pathway and reduce the risks that are there within the business and make for a better investment for the clients investing in that particular fund.
Absolutely. It's always open to us to divest, but there are other ways that we can do more for our clients.
Melanie, that was fantastic. I learned a lot. I always learn a ton, even in a brief conversation like this. And I'm sure the listeners learned a lot as well because it's such a challenging world, but so important and nobody does it better than you. So thanks for always saying yes to the invitation to come on the podcast. We really appreciate it. That was fantastic.
Thank you so much for having me. As always, it's a real pleasure.