Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe. Today’s podcast features Andrew Sweeney, Vice President and Portfolio Manager at PH&N Institutional, discussing the increasing prominence of responsible investing. Thanks for joining us, Andrew.
Andrew Sweeney: Yeah. I’m glad to be here. Thanks, Murray.
Murray Bender: To start, Andrew, can you tell us a bit about RBC Global Asset Management and PH&N Institutional?
Andrew Sweeney: Absolutely. So, PH&N Institutional is the Canadian institutional arm of the broader RBC Global Asset Management. And RBC Global Asset Management is the largest asset manager in Canada, with over $500 billion in assets that we manage for clients worldwide.
Murray Bender: What is a simple definition of responsible investing or sustainable investing, as it’s referred to in some quarters? And can you talk a bit about the different components of responsible investing?
Andrew Sweeney: Yeah. So responsible investing is an area where there absolutely is a wide range of nomenclature out there, and it’s quite confusing to those that are uninitiated.
In terms of a simple definition of—what we would use the term responsible investing or RI, we view that as an umbrella term that broadly describes a number of different investment strategies that would generally include the integration of ESG, so environmental, social, and governance factors, as part of the investment process.
But under that umbrella of responsible investing are a number of flavours. So we would talk about, say, socially responsible investing or SRI, which, in our world, means you’re screening out particular sectors or companies. But also within this responsible investing umbrella, we talk about active ownership or stewardship where we’re quite an active owner of companies we own and have a heavy degree of engagement with those companies on those ESG-type issues.
Murray Bender: What’s the level of interest that you’re seeing among institutional investors when it comes to RI?
Andrew Sweeney: So, I’d say in the last five years or so, we’ve seen a very, very rapid adoption of responsible investment by institutional investors globally. And if we go back and wind back the clock and go back five or 10 years ago, there was a concern among many investors that there was a trade-off and that, if they would go down the road of investing responsibly, that that might eat into their risk-adjusted returns. And I think once that myth was sort of dismantled, you had investors really start to think about and embrace the concept of responsible investment.
And so what we’ve seen is pretty broad adoption globally. If we break it down by geography, I’d say Europe is clearly the market leader. Europe has embraced it more rapidly than other jurisdictions, and we’ve had a huge advantage of just looking to Europe to see where things are going.
Canada has had quite strong adoption, following along the trail that the Europeans have blazed. And the U.S. is an interesting one where the adoption rate in the U.S. is lower on average, but within the U.S., there are some important leaders who really have pushed and been quite aggressive in their adoption of RI.
So it’s become a really, really big deal. And in fact, I can’t think of a conversation we have with clients today that the topic doesn’t come up as part of our discussion.
Murray Bender: In your view what’s driving the increasing importance and rapid adoption of RI?
Andrew Sweeney: So the adoption is being driven—I think one of the biggest real drivers was that recognition I described earlier where the concept of a trade-off has sort of been dismantled. And so, once investors started not to think of this as something that has a cost to it but something that’s potentially additive to risk-adjusted returns, I think that was a really key turning point.
And so I think now most institutional investors look at ESG as a broader lens that can help them potentially identify risks that they might not otherwise pick up in traditional financial analysis, but also, potentially surface some opportunities.
And so, once ESG became about risk and return, which is sort of a framework I think that everyone in finance is quite comfortable with, that really led to increased adoption. Because all of a sudden, the obstacle of, well, am I giving up return in order to get this benefit, I think once that was gone, really, you saw the benefits really revolving around the risk reduction and the potential to enhance returns across your portfolio.
Murray Bender: What are some of the challenges faced by institutional investors in incorporating RI within their portfolios?
Andrew Sweeney: So the challenges question is a good one because, as much as people are going down the road of adoption, it’s certainly not an area where there aren’t some challenges.
So some of the big challenges that pop up for people is, they really have to step back and think about what are their investment beliefs; do they want to go down the road of divestment and excluding certain sectors or stocks. So that’s sort of an important junction that people need to think about.
But the other area that I think affects all investors is when we really start to break it down and say, what does it mean to be a responsible investor in different asset classes. And, as part of RBC Global Asset Management, we do a global responsible investment survey every year. And one of the things that really jumps out of the data right around the world is that asset owners are making real progress in areas like public equities and fixed income where RI adoption rates are quite high. But when we look at alternative categories like hedge funds, we find that the adoption rates are significantly lower, and then we find that real assets like real estate and infrastructure are somewhere in between. And so the rate of adoption between asset classes is quite different, and that just speaks to the opportunity set and just the way that those different asset classes have developed.
I think one of the other really big challenges is the issue of, let’s call it greenwashing. And what we’ve found is that, within the asset management industry, I’d say most managers now have a credible ESG narrative. The real test for asset owners is really to figure out which managers are doing what they say they do, and which managers just have a strong narrative but haven’t necessarily followed through in terms of what they’re doing on the ground, what their portfolio managers are doing day-to-day within portfolios.
Murray Bender: Finally, Andrew, how do you expect responsible investing to evolve going forward?
Andrew Sweeney: I think that looking forward, there’s a whole number of exciting things that are happening, and maybe let’s break them down into a few different areas.
First and foremost is, I think there’s real data challenges that everyone is struggling with. There are a number of different global reporting standards which really have proliferated and have caused great confusion both for investors and for corporate reporters. There’s a movement afoot really to try and standardize some of this reporting, and I think that will be well-received both by corporate issuers as well as investors. Markets really do crave standards, and I think this will be helpful. And really, it will lead to information that’s relevant and material for investors to make decisions around ESG-related issues.
Secondly, I think we’ll see a significant regulatory push. We’ve already seen this in Europe but we’re seeing signs of it with the SEC in the U.S., and I think there’s potentially the opportunity where Canadian regulators step in as well. On the SEC, we’ve seen a significant change in tone since the Biden administration was elected. And in Canada, we’ve heard some rumours or chattering in the background that we might see some reporting regulation particularly around climate so that the TCFD, the Task Force on Climate-related Financial Disclosures, that that may become mandatory for public companies going forward.
Thirdly, I think that we’re going to see increased reporting by investment managers regarding their integration of ESG and their stewardship of client capital. And so what we’re seeing is that asset owners are pushing asset managers for better reporting so that those asset owners can report back to their own constituents.
And then lastly, and the one I find sort of most fascinating is, I think we’ll see more proxy battles on ESG-related issues. And we’ve seen proxy battles for a number of years. They’ve mostly been around corporate strategy and control of companies. But most recently, we saw with Exxon Mobil a proxy battle where an activist investor, a small, relatively new activist investor was really pushing Exxon on transparency around transition and climate reporting. And this particular activist was able to get the attention of large investors and, ultimately, got two directors elected to Exxon’s board. So I think that will probably embolden other activist investors, and so I think we’ll see that as well.
So I mean, I think it’s a very, very exciting space, and we’re going to see a number of different things and lots of different news as we go forward.
Murray Bender: Thanks for sharing your insights on responsible investing, Andrew. We really appreciate your time.
Andrew Sweeney: Murray, thank you so much for the opportunity to talk about a topic that’s very near and dear to my heart.
Murray Bender: Today’s podcast has been brought to you by RBC Investor & Treasury Services and we hope you found it useful. For additional insights on the future of asset and payment services, including our previous podcasts, visit rbcits.com/insights. I’m Murray Bender. Thanks for listening.
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