In recent years within the investment industry, there has been a growing focus on considering and integrating environmental, social and governance factors (known as ESG) within investment decision-making and processes. The role and impact of ESG integration within overall investment practice is far-reaching and has the potential to add value by enhancing the long-term sustainable performance of portfolios. From an organizational perspective, research indicates that companies with strong ESG-related practices have lower risk, lower cost of capital, better operational performance and generally have better share price performance over the longer term. Approximately half of Canadians consider aspects of responsible investing as part of their investment decisions.1 These factors seem to be an even stronger driving force among Millennials, as studies indicate that approximately two-thirds of Millennials consider environmental, social and governance factors as part of investment decision-making and that 82 percent think responsible investing will become more important over the next five years.2
Currently at the institutional investor level (including pension funds, foundations and endowments), there is a proactive and conscious shift taking place towards responsible investing as a tool to improve the investment process, a shift that is also beneficial to retail investors. RBC Global Asset Management Inc. (RBC GAM) is a proud Canadian leader in ESG integration/responsible investment.
What is ESG?
At a high level, ESG investing can be defined as an investment practice that focuses on integrating the three ESG factors — environmental, social and governance — into the fundamental analysis of investments, to the extent that they may have an impact on investment performance. The degree to which ESG criteria is relevant to an investment will depend on three key things: the company itself, the industry it operates within, and the nature of the investment vehicle for which securities in the company have been purchased. Specifically within each of the ESG factors, consideration is given to components such as the following:
Environmental: The impact of a company’s activities on the climate and the environment, including greenhouse gas emissions and the risks and opportunities presented by climate change, energy efficiency, pollution, water and waste management, site rehabilitation, biodiversity and habitat protection.
Social: Human rights, community consent/impact, respect for indigenous peoples, employee relations and working conditions, discrimination, child and forced labour, health and safety, and consumer relations.
Governance: The alignment of interests between the company and its shareholders, executive compensation, board independence or composition, board accountability, shareholder rights, transparency/disclosure practices, financial policies and the protection of private property rights.
Within RBC GAM, it is important to note that its investment teams have always considered these factors to a certain extent, but the more recent firm-wide integration of ESG factors throughout the investment process across all asset classes marks a formal and proactive commitment to responsible investing as a whole. This approach has been carefully developed and rolled out to all of its investment teams over the course of the last three years and is backed by research, resources and tools that enable each investment team to formally and successfully integrate ESG factors that may have a financial impact on their funds’ investments.
Differentiating between socially responsible investing (SRI) and ESG integration
It is important to recognize that socially responsible investing (SRI) or ethical investing is very different from ESG integration. Specifically, socially responsible investing is a portfolio construction process that attempts to avoid certain investments according to defined ethical guidelines. In other words, SRI is values-based and involves the formal integration of social values into the traditional investment process. It focuses on screening out or excluding particular investments based on a defined set of values, and an example of this may include screening out investments in companies affiliated with the tobacco, alcohol or gambling industries.
ESG investing, on the other hand, does not involve negative screening or values-based judgments about a particular security or sector. Rather, it applies much more broadly to the entire process across all investment strategies. The integration of ESG factors is a more holistic approach to investing and involves an enhanced analysis of companies to better understand their ESG-related risks and opportunities.
RBC GAM Socially Responsible Investments
For individuals who feel strongly about specific values-based investing or who prefer to exclude certain industries or sectors that they feel are objectionable, RBC GAM offers a suite of SRI funds that integrate SRI criteria into the investment process by screening potential investments based on their ESG policies or the industries in which they operate. For more information on SRI funds or to learn more about socially responsible investing in general, please visit RBC GAM.
Key components of ESG investment practices
In addition to integrating ESG factors into the investment process, there is a growing recognition that investors are required to be active stewards of their investments through regularly monitoring investment performance (on ESG issues and otherwise), actively engaging with the companies in which they are invested, and thoughtfully exercising all of their proxy voting rights.
“Engaging” or “engagement” refers to direct communication and constructive dialogue with the boards and management of investee companies. The purpose of engagement is to better understand a company’s approach to ESG issues, communicate an investor’s views, obtain information in advance of a voting and/or investment decision and where appropriate, to encourage the company to adopt better practices. As such, engagement can be an important tool to encourage companies to make changes designed to improve shareholder value over the longer term.
Proxy voting is a central component of RBC GAM’s engagement process, providing an important way to convey its views to boards and management. RBC GAM has an obligation to make voting decisions independently, and in the funds’ best interest in accordance with its custom Proxy Voting Guidelines. Those guidelines offer an overview of the corporate governance principles RBC GAM supports and how it will vote on ESG-related issues. RBC GAM has committed significant resources to proxy voting, allowing it to internally assess every voting decision individually. For more information on RBC GAM’s Proxy Voting Guidelines or proxy voting reports, please visit the RBC GAM website.
UN Principles of Responsible Investment
- Incorporating ESG issues into investment analysis and decision-making processes.
- Being active owners and incorporating ESG issues into ownership policies and practices.
- Seeking appropriate disclosure on ESG issues by the entities in which we invest.
- Promoting acceptance and implementation of the Principles within the investment industry.
- Working together to enhance effectiveness in implementing the Principles.
- Reporting on activities and progress towards implementing the Principles.
Putting approach into practice
In the shift towards adopting and integrating ESG factors as part of the overall investment process, European institutional investors have been the leaders. Over recent years, institutional investors within North America have increased their focus on ESG and responsible investing practices, and RBC GAM has been a frontrunner in Canada by developing a credible, comprehensive and effective approach to integrate ESG factors. As part of its commitment to responsible investment, RBC GAM has created a dedicated Corporate Governance & Responsible Investment group to consolidate and lead the efforts in ESG integration and responsible investment. This resource commitment demonstrates RBC GAM’s dedication to understand and effectively integrate ESG criteria into its investment process.
RBC GAM formalized its commitment to responsible investment in 2015 by becoming a signatory to the United Nations Principles for Responsible Investment (PRI), which is an international framework for ESG integration. PRI signatories commit to implementing the six Principles of Responsible Investment and reporting on their activities and progress in implementing them.
Visit RBC GAM for more information about responsible investing and the integration of ESG within RBC GAM.