Fossil Fuel Free Global Equity | RBC Global Asset Management

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The Fossil Fuel Free Global Equity strategy is a high-conviction global equity portfolio managed by a stable team of experienced industry specialists with a tried and tested investment philosophy. The strategy is differentiated by its investment process, which focuses on taking an ownership mind-set to drive Environmental, Social and Governance (ESG) integration and active engagement, as well as its dedicated, risk-aware portfolio construction process. The team’s approach leads to performance that’s driven by stock-specific risk, a source of return that has no persistent correlation to other active return. The strategy also seeks to minimize exposure to companies involved in extracting, processing and transporting fossil fuels.

Strategy overview

Long-term ownership mind-set with integrated ESG
Focus on companies with sustainable Competitive Dynamics
Efficient usage of risk
Minimizing exposure to extracting, processing and transporting fossil fuels

Our approach

Exclusion framework

The intention of the Fossil Fuel Free strategy is to minimize exposure to companies involved in extracting, processing and transporting fossil fuels. To do this, the Fossil Fuel Free framework applies two layers of screens to identify companies ineligible for investment:

1. The Fossil Fuel Free strategy will use an exclusion list based on the Carbon Underground 200 (CU200). Any company included in the CU200 report is ineligible for investment. The CU200 report identifies the top 100 public coal companies globally and the top 100 public oil and gas companies globally, ranked by the potential carbon emissions content of their reported reserves. The CU200 list is maintained by the independent third-party provider Fossil Free Indexes LLC and is updated quarterly.

2. RBC GAM, in consultation with Sustainalytics, developed the second layer of the FFF proprietary framework. Sustainalytics is responsible for assessing the performance of companies against this framework for the Fossil Fuel Free strategy, which will not invest in:

a) Companies deriving >0% of revenues from any of the following activities:

Arctic Oil & Gas Exploration and Extraction
Oil & Natural Gas Exploration, Production, Refining, Transportation (i.e. pipelines, railways, etc.) and/or storage
Oil Sands Extraction
Shale Energy Extraction
Thermal Coal Extraction

b) Companies deriving >10% of revenues from any of the following activities:

Oil & Gas Supporting Products/Services - refers to any tailor-made product and/or service that is provided by third-parties to support the oil and gas exploration, production, and refining process - e.g., rental of tailor-made equipment, geophysical engineering, chemicals to support drilling, etc.

c) Companies that are significant owners of ineligible companies are ineligible for investment.

Team

The RBC Global Equity team has been managing client money the same way since our foundation in 2006. The investment team enjoys a very strong, collaborative culture based upon teamwork, transparency, alignment and continuous improvement.

The Team believes culture is critical in turning a collection of skilled individuals into a strong team that is committed to making a positive difference for our clients, for investee companies, and for the communities in which we operate.

Philosophy

We believe that over the long-term, investing in great companies at attractive valuations generates value for shareholders that significantly exceeds the return on the average company or the market.

Great businesses create contingent assets based on extra-financial forms of capital. These are often subtle, qualitative characteristics that can take time to be reflected in company financials; characteristics such as sustainable business practices, engaged employees as well as great relationships with suppliers, customers, and the community. Because these do not immediately accrue to the bottom line and are not reflected in typical financial reporting, the market often underappreciates their impact. However, healthy extra-financial capital mitigates risk and creates long-term economic value. We believe that by evaluating the health of extra-financial factors, including environmental, social and governance (ESG), we are not only able to reduce risk and uncover alternative sources of alpha, but also achieve a responsible allocation of capital.

Our Competitive Dynamics framework

We use industry analysis to identify great businesses within their competitive set before assessing them using our Competitive Dynamics framework. We will not invest unless all four criteria are satisfied.

Winning business model

Each business in the portfolio has a unique, hard-to-replicate element that gives it a sustainable edge over its competitors. That element varies from industry to industry, which is why we are structured as a team of industry experts.

Market share opportunity

We pay close attention to the industry structure and nature of competition and expect a company with a true edge over competitors to expand or at least maintain its market share.

End-market growth

We believe that a company with a winning business model able to take market share will amplify the amount of value creation if it is exposed to growing end markets.

Management and ESG practices

We believe investing is not simply renting a share for a period, but taking an ownership stake in a business and accepting the responsibility that ownership entails. We want to partner with responsible management teams who can both operate the business effectively on a day-to-day basis and position it strategically over the long term.

Portfolio construction and risk management

In constructing the portfolio, we use our proprietary risk application in order to analyse the portfolio's risk exposures, enabling us to build-in sufficient diversification for us to capture the stock-specific intended risk sources whilst maintaining a focused portfolio of best ideas. By ensuring the individuality of those best ideas, we maximize diversification of unintended risk exposures and avoid bias-creating concentrations. The result is a portfolio where excess returns are dominated by the investment philosophy and stock-specific risk.