Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is «neighborhood day» today on the Download. We've got my favorite neighbor, Melanie Adams. Melanie, what's going on in the neighborhood today? I think it's another one of these days where we walk outside, and it smells like smoke. So this is probably a good time to have you on to discuss all this stuff.

Yeah, absolutely. I'm really happy to be here, Dave, and I'm flattered I'm your favorite neighbor. I feel very much likewise.

Well, let me tell you something, though. I've got some stuff on your neighbors. Melanie lives on a different street than me— but I got some stuff on neighbors on your street. We won't share it on the podcast; we’d get in trouble. But I tell you, there's stuff going on your street, boy, you wouldn't believe it.

Oh, no. Sounds like we got to have a coffee. An espresso, maybe?

There we go. An espresso would be good. Melanie, you head up responsible investing at RBC Global Asset Management, and so you've got a lot of stuff on the go all the time. Obviously, ESG is always in the news. What's new in terms of ESG right now? Is there anything that's happening in your world right now that's of particular importance or relevance to investors?

There's a lot going on in this space right now, and I think I would start by saying the regulatory requirements that we're seeing evolve has been the biggest focus for us right now because we are a global asset manager. We are dealing with regulatory requirements in Europe and in the UK. We've seen changes in the regulatory requirements in Canada. And in the US, the SEC has proposed some, but of course, probably the next biggest bucket is the bifurcation and the ESG backlash that we've seen in some jurisdictions and particularly in the US. So, on the one hand, we've got a lot more heightened regulatory regimes, more scrutiny in that space, and on the other hand, we've got ESG backlash, particularly in the US, where we're seeing a number of states using ESG as a political issue. We're seeing some states becoming big proponents of ESG, and we're seeing other states saying ESG is about values and is inappropriate, which is something that I would actually like to correct. For us, ESG is about looking at the whole picture for issuers. It's about long-term risk return. And so, seeing these competing narratives globally has been a very interesting dynamic. It's been a lot of interesting work in this space lately.

So, Melanie, I wanted to get into that with you— and I hope you're okay with it—, this backlash thing in the US. For a long time, I pretty much never saw a negative article related to ESG. It was all an understanding that you're trying to evaluate companies or try to think about companies on a different plane, a different way of measuring risk and along lines that most people would agree with. Good companies that are worried about the environment, probably a good thing. Companies that take care of their employees, probably a good thing. Companies that follow good governance, that seems like a good thing. Yet, I'm starting to see more and more articles that are on the other side of that, that this is actually a negative in terms of the way an investment manager might evaluate a company. First of all, why do you think that's happening and why is that wrong-headed in a way?

Well, it's wrong-headed for sure because it's a misunderstanding of what ESG integration is. An ESG integration is all about looking at all the factors that might implicate the financial performance of a company over the long run. Nobody saw COVID coming, but a number of health and safety issues came to the forefront and how companies were dealing with that became a very important factor for investors to understand when they were evaluating companies. When Russia invaded Ukraine last year, energy security issues came to the forefront and understanding what these meant from a risk-return perspective is critical. Now, what seems to be happening with the ESG backlash is it's becoming a bit of a values- and an ethics-type issue. People are saying, well, ESG is actually about looking at what are your values. Do you not want tobacco in the portfolio? Do you not want weapons in the portfolio? Those kinds of things which can be a part of ESG, these types of screens and how you're looking at them. Because they can be risks for companies if they're too heavily involved in controversial areas. But deciding to screen them out wholesale from a portfolio, whether it's because of your own ethics or these types of reasons, that is a little bit different from ESG integration because that is taking a more values-based ethics approach to investing. And so that's where we start to see some of the ESG backlash because as we all know, there's so many areas of gray in ethics and you can be on one side or another side of debate. Everybody's got different opinions. Certainly, in the US we see that in the fossil fuel area. We see that in a number of areas. There's been a lot of controversy around health care and reproductive rights in the US as well. And so people have different positions on these kinds of things and they're saying that's what ESG is. And to me, it's a bit of a misunderstanding about what ESG integration is, which is about understanding all of these risks, not taking a personal ethical position on it necessarily, but understanding those risks and then deciding whether or not that's a company you want to be invested in or not. And sometimes when it's become a political issue— and I think that's also bred some of the anti-ESG movement—, that as soon as something becomes a wedge issue, then it can get a life of its own. And so it seems to have gained some traction in that regard. And so I think it's a bit unfortunate because I think it's a disservice to investors who want their asset managers to be looking at the whole picture. They want them to be assessing all of these different governance issues, social, environmental, and how is the company thinking about these risks? For asset managers to not do that I think is at the detriment of long-term results and not in clients’ best interest. So we're watching very carefully how this plays out in the US. I don't think we're going to have any real resolution in the next little while, with an election year coming up. I think we're going to continue to see this being used as a bit of a wedge issue. So for me, a lot of the focus has been about clearing up the narrative actually about what this is. Let's not let this become obscured about what ESG integration is and what it's not.

Yeah, I think this has been a really great primer. I didn't intend the discussion to go this way, but again, when you're talking to a good neighbor just over the fence, sometimes you learn some things about what's going on in a way that you didn't understand before. But the integration idea is, again, just another tool to evaluate risk, to evaluate the company that you can put in front of an investment manager who's making the ultimate decision as to whether they're going to invest in that company or not. And it's just part of that big toolbox; they're measuring price earnings ratio, price to sales ratio, return on equity, all of those things. It's another thing that goes into the basket around that decision. But then you can take it the next step, which is to actually have a fund that excludes certain things and that's where an individual choice can come in. So what it does is just better risk evaluation; a better evaluation of the company overall. Another tool. And then you can take it to the next step where for someone for whom it's very important that something is excluded from a portfolio, as you mentioned, say tobacco, that it is excluded, and that option is available. But then even beyond that, everything that's in that portfolio is also evaluated on that different plane of risk. Again, it seems like a no brainer that this is a valuable tool or at least another tool that helps an investment manager get to a better decision around what they want to invest in.

Yeah, that's an excellent way to put it. That's a really good summary. And I think one of the areas where we're seeing some of this is in the climate and the climate metrics and how we're thinking about that, because that has become a huge risk for companies and how they're thinking about their own carbon footprint, their carbon emissions, and how they're looking to address them going forward into the future. And as investors, we've become really focused on what that means for the company. Yes, we are good citizens, and yes, we do want to see us tackle this transition globally, but what we also want to understand is, are the companies thinking about these risks in a way that they've got the proper oversight, they've got the proper management, they're thinking about what their transition plan is? They have a strategy in place and thinking and providing this type of transparency to the marketplace about what these companies look like and how they're thinking about that. It's become an interesting evolution where we're seeing more data, we're seeing more information on some of these ESG risks that we didn't have before. And the next step is to look at that and see, well, what does that mean for the long-term benefit of the unitholders and the funds in which we manage?

One of my favorite simple examples of how this comes into play is if you've got a bank or an insurance company. A bank has a mortgage on a property, a commercial or a residential property. The insurance company insures that property, and they need to understand how climate change might affect the flood risk or the heavy damage from a higher frequency of storms in the area. Anything that allows them to make a better assessment of the actual risk that they're taking, which makes them a better lender, a better insurer and potentially a better investment for whoever is buying that particular stock. It just comes down to more sophisticated tools to understand at depth what is the risk of the investment you're making.

Absolutely. And what you described, the flooding, that's a physical risk of climate, but there's also the risk of carbon pricing. So what does that mean if carbon pricing comes in for different jurisdictions? What does that mean for that company? Are they prepared for that? Have they done scenario analysis on the balance sheet to see how that might impact their long-term revenues? Part of that is making sure companies are doing that type of scenario analysis and they're understanding what that looks like and what is likely in their region, their geography, what are the impacts that they're likely to see.

How do you and your team put in the right tools or controls or measures in place to help investment managers make good decisions around this? It seems so complex.

Well, it is very complex. There is a lot of metrics in this space. There are a lot of scientists globally looking at what are the best metrics, what are the best pathways that we should be assessing. What we do at GAM is on a quarterly basis, we send out to all of our investment teams— actually, we don't even send it out anymore— an interactive online tool that the investment teams are able to access and they can see on their funds. We do this for over 150 of our core funds. They can see what their portfolio looks like. They can see under different temperature scenarios, what are the issuers within the portfolio that are lagging peers, that are potentially more at risk depending on whether it's a transition risk, carbon pricing, or they're at risk for flooding and wildfire risk. And so we can see that from the tool that we've built, that's an online tool. We look at numerous different metrics and so the investment teams have that tool that they can use to help their assessment. But the other item that we do, just to be very transparent with the marketplace, for the third year now, we have our TCFD, the Task Force on Climate Related Financial Disclosures Report, rebranded this year. We're in line with the RBC branding, which calls it a climate report. So GAM has its climate report where we disclose all of these metrics out there publicly. What do our overall portfolios look like? Where are we ahead of the benchmark in terms of carbon emissions? Where are we behind? What is the implied temperature rise of our portfolios? Because we're very interested in being as transparent as we can and saying, this is the data we have. Have a look at our portfolios. We're continually assessing them and trying to see if there's any areas where we can engage with companies and talk to them about what are their strategies if we view that they potentially are at risk. We're a large investor and so typically boards and management will be open to hearing from us to talk about these issues. So that's how we've been thinking about it. We're continually refining these, looking at new data sources. Sovereign data for sovereign fixed income has become a really big issue where we've been able to get access to more sovereign data than we had previously. So that's been really interesting to look at and follow that along as well. But it's still a journey. We're still working with all the different data and the different tools. And I think an area going forward in the future that we really need to crack is which one of these metrics is the most important from a risk-return perspective? What is the one that stands out of all these metrics? Which one do we care about most? Do we care about the weighted average power intensity? Do we care about absolute emissions? Is it implied-temperature rise? Or is it a combination of all of those? So we look at all of these different things and look at the performance of all the issuers.

And then again, I imagine this is something even when you're out talking to these companies. Or countries. If we're talking about sovereign debt— and that would be an example of when you talk about sovereign fixed income, this would be evaluating the risk. Say, I'm buying a Peruvian government bond. I'm going to evaluate the climate risk or the risks overall within Peru, which could impact the ability for Peru to pay back that debt. Because when I buy a Peruvian bond, I'm lending money to the Peruvian government. So that's where sovereign would fit in there, correct?

That's exactly right. But we typically have less opportunity to engage on the sovereign side. We're typically engaging with companies more frequently about what are their climate transition plans. But when we think about sovereigns, we're looking at what commitments has that country made to this? What are the risks that that country is particularly vulnerable to, potentially? And so those are the kinds of things that we're assessing. And then when we talk to companies, we're asking them: how does the board think about climate? How is it being oversee? How is it being managed in terms of a risk? Because it's also an opportunity as well. There's an opportunity for green solutions. There's an opportunity for investing in the transition and what that could look like. So understanding that can be very valuable as shareholders.

And then again, where I was going earlier. Stu Kedwell, for example, who we talk to regularly on Stu’s days, on the podcast, spends a lot of time talking to management. And this would be another indicator of the effectiveness of management, or the effectiveness of government understanding the risks that are all around them and how they manage those risks?

Absolutely. And Stu and his team, they're very engaged on this. They look at their climate dashboards and they're meeting with companies and understanding how the company is thinking about the transition on climate. And more broadly, other ESG factors as well; the governance factors, the social factors that we see. It's continually evolving and changing. We can't just say that these are the factors that matter for this company. There are some that are more material for particular companies. But then, we have global events like Russia invading Ukraine, and suddenly certain issues come more to the fore than ever before. So it's actually a really interesting space to be because when you open a paper every day, that impacts how you're thinking about some of your companies and how you're making your investment decisions. But definitely, Stu and his team are very engaged in these topics.

And again, I keep coming back to that great tool to evaluate things on so many levels. Just like when I think of a job interview when I might ask a potential employee a question that gauges their awareness of a situation that they might be in the midst of, in their role. And it might seem like it's not directly related to the job itself, but it informs me of that awareness, the thoughtfulness, how they prepare for something. And again, it's just another great tool for evaluating a company. Just before we wrap up, we've got Europe where this is table stakes and has been for a long time. We've got the US, where we've talked about the politics and the backlash. Let's focus on Canada. Where does Canada sit between the two? And then what direction is it heading? Is it looking like it's going to become more of a political issue because of our proximity to the US and US media, or are we moving more along the lines of Europe?

I would say Canada is probably in the middle, but I think Canada is forging its own path. And I hear sometimes people say, well, Europe's out ahead and everybody's going to eventually follow Europe. But I think what's happening in Europe right now with the regulations is they're very data driven. They're pulling in all of these ESG metrics, whether or not they're material for a particular issuer, and they have to report out on them. And so it's been fantastic for ESG data providers. We pay for a lot of different ESG data and different ESG metrics, but Europe's gone down a very prescriptive data driven path. And I think that's not the way Canada is going to go. So Canada will not mirror Europe in that sense. Canada is more taking the view that how you integrate ESG is up to you, but just be very transparent about it. And that's what the CSA came out with last year with their guidance. And we updated our perspectives to make sure we're being as clear as we could about how we're integrating ESG. But there's not a requirement to report out on these specific ESG metrics like there is in Europe. And I have not seen in Canada an appetite to go down that data-driven path. But I also have not seen in Canada it become the political wedge issue that we've seen in the US. I also don't think Canada is going to go down that path. I think there's largely a lot of alignment across the country, that climate is an issue that we all need to address. It's an important issue. Good governance practices are incredibly important. There may be a little bit of difference on exactly what that looks like, but overall, philosophically, we're not seeing that divide in Canada. So I think we're forging our own path here right now. And I think actually it's going very well. I think we're on the right path in Canada here.

Well, Melanie, that's a very appropriate way to finish off as we're taping this on June 30. July 1, for those listeners around the world— most of our listeners are Canadian, and they know that July 1 is Canada Day— so that's a great way to end it up. Canada is great. That's what we say, right? That's why we live here and why we'll celebrate Canada tomorrow. It's the best place in the world, in my opinion. And Melanie, I know you feel the same way.

That's right.

Absolutely. So happy Canada Day, everyone. Melanie, thank you very much. We'll see you down at the fireworks tomorrow and hopefully you have a great long weekend with your family.

Thanks so much, Dave. Same to you.