Responsible investing: a landscape of bright spots and shadows
By Freddie Fuller, European Equity team, and Melanie Adams, Head of Responsible Investment for RBC GAM.

Freddie Fuller 00:03
Good morning, everyone. My name is Freddie Fuller, and I'm the Product Specialist for the RBC European and International Equity teams. Today, I'm joined by Melanie Adams, Head of Responsible Investment at RBC Global Asset Management. Welcome, Melanie.

Melanie Adams 00:17
Thanks very much, Freddie. It's a real pleasure to be here.

Freddie Fuller 00:20
Melanie, in the last few years, I suppose every year, seems to be labeled ‘key’ or ‘seismic’ with regard to ESG and responsible investing. In probably a poor attempt to avoid superlatives, maybe we could just start by saying that 2024 has been eventful, to say the least. Importantly, we've seen different regions undergo very different cultural and regulatory events.

Given your global remit, we thought it'd be very interesting to get your perspective on where North America lies with regard to RI and ESG investing. And then perhaps later on, a view on some of the divergences that we're seeing, particularly with Europe.

Melanie Adams 01:00
Absolutely. It's a great question, because what we're seeing in North America is quite different from Europe. In terms of regulations, there have been a number of increased regulations, particularly in Canada. For North America overall, the philosophy is more, rather than a prescriptive regulation where they're looking for very specific, detailed disclosures on certain topics, what we're seeing is more disclosure, particularly on the asset management side. You can do what you want to do in this space, but make sure that you're being fully transparent about it. More disclosure about writing more in the fund, details about exactly what ESG integration means, for example, to different funds, exactly what is being excluded at what threshold and so forth, but not with a requirement to disclose particular fields.

Now, we are seeing some movement, ISSB, obviously, internationally is getting some movement. There's been discussion around that. We also cannot talk about North America without talking about the ESG backlash that we've seen in the US. This has certainly been a very, very big part of the past year, with the antitrust activities that the Attorney General's allege are resulting from some of these collaborative initiatives like Climate Action 100+, which has seen quite a number of folks, participants, members leave in the past year, out of an abundance of caution in that respect.

We're also seeing a number of states questioning screens on funds or the non-participation by issuers in certain sectors, and they're concerned that there's a boycott of certain industries or product involvement areas, which has been called out as being problematic. It's been a tough area to navigate, to make sure that we're very clear and transparent that whatever we do at RBC GAM, we're always doing in the best interest of our clients. It's always about our fiduciary duty and the long-term interests of the portfolios that we're managing.

Freddie Fuller 03:07
Yes, well, as you say, sort of a huge amount that's come out, maybe we could sort of focus on two elements. First, particularly Canada, now over here, we very rarely sort of hear much in the sort of broader media around Canada and its approach to RI and ESG investing, a lot of that focus is on the States, and we can talk about the backlash in a bit. What are the sort of key differences you see between the US and Canada, not just in regulation, but also, I suppose, from more of a sort of societal perspective?

Melanie Adams 03:44
Yes, and as I said before, the one key similarity is in the regulations and the idea that, say what you're going to do and be transparent about it. That's sort of the guiding philosophy. However, there are some really big differences that we are seeing in Canada. One is we're not seeing the ESG backlash that we've seen in the US, on the whole. There is some pullback in some areas. Certainly, Canada has a large energy sector that has always been a part of its economy, an important part of its economy. For the most part, this sentiment in Canada is more that we need to look at and assess these risks and make sure that they're being managed appropriately.

What's interesting in Canada right now is there's been a lot of movement in the past year, and particularly the past few months, there's been a consultation on bringing the ISSB standards, the International Sustainability Standards Board standards, into Canada, the CSSB. ISSB does have an office in Montreal, in Canada. What we're seeing with CSSB is a lot of investor support, but some pushback from issuers who are looking for perhaps different implementation dates or some more staged implementation requirements, or some changes around the particular requirements.

In particular, Scope 3 has been looked at and what issuers are required to disclose there. It remains to be seen at the time of this recording, whether these standards will go through in Canada. It's a very exciting development for investors, if we're able to get this type of standardised reporting, but still to be determined.

Freddie Fuller 05:18
It's interesting. Going back to the to the to the backlash point in the US, and obviously, it's encouraging that Canada, in particular, hasn't sort of seen a mirroring of this. Without unfairly putting you on the spot, I wondered if you might talk about whether you and the team have a view as to the likely impacts of the recent election in the US, and how you think both at a societal level and corporate level? I'm thinking particularly of the phenomenon of greenhushing here, and perhaps a regulatory one, what changes might be occurring in the near future?

Melanie Adams 06:08
Yes, I think we're going to be watching this very, very carefully to really assess the impacts. I do think there will be a lot of impacts, and we need to be very, very mindful of what the new administration might do under Trump.

One is the Inflation Reduction Act. He has promised to scale this back; it remains to be seen whether and how this can be done. There are a lot of states that are more traditionally Republican that are seeing a lot of benefit of the funds that have flowed as a result of the IRA. It will be interesting to see how this potentially would be scaled back, if at all.

The other areas, of course, that we're seeing are women's reproductive rights; it’s a really big issue that we'll be following…if there are any impacts as a result of that, and Diversity & Inclusion, we're seeing a bit of corporate pullback from their commitments in this space.

I think, Freddie, you're exactly right, when you say greenhushing, it's a little bit of hushing on all of the topics and corporations, issuers, asset managers being a little bit wary about wading into some of these topics, or putting their positions out there too publicly for fear of some type of reprisal.

Freddie Fuller 07:16
Again, this is something that we look at in Europe in terms of whether this is something coming over the hill. Maybe we could turn to Europe at this point. A lot has been made, perhaps with some negative connotations about Europe having gone too far with regards to regulation, and the bloc itself being viewed very much as a risk regulator, rather than a risk taker, and that in itself leading to some unintended consequences, I suppose.

That being said, in our view, it's fairly clear that while the current electoral makeup of the European Parliament and leanings of the Commission remain as they are, the focus from detailed regulation and risk mitigation appears unlikely to change in the short to medium term. From a corporate perspective, and in turn ours, from a European equities investing lens, this is leading some really substantial pieces of legislation, which I'm sure you're well aware of, coming through, that are changing entire production processes and how they're managed, and supply chains and their scrutinisation.

The laws that probably have grabbed the most headlines are those concerned with waste and product design, and specifically the eco-design for sustainable products regulation, and the packaging and packaging waste regulation, which despite their rather dry titles, are significant pieces of legislation that are really altering the face of both production and manufacturing in the bloc.

Melanie, from an investment management perspective, however, the environment continues to grow far more complex month-by-month, year-by-year. This is something you're really having to contend with and manage on a day-to-day basis.

Melanie Adams 09:16
Yes, that's absolutely right, Freddie. In Europe, what we're seeing is the regulatory regime has been more focused on data, and a little bit more prescriptive in terms of which data points issuers and asset managers need to disclose. There's been a little bit of focus on asset managers disclosing these data points, and we don't have the data necessarily from issuers. This has been a bit challenging, especially on the fixed income side when we're looking at those particular types of securities.

The concern can be, is this disclosure really meaningful for our clients? What does it mean when we put all this work into building the data infrastructure to be able to report on these types of items? How does it benefit our clients? Is it something that is meaningful for them to know?

Some of the regulation around this has been SFDR, we've seen the EU taxonomy, we've seen CSRD, the corporate sustainability disclosures there. It's a lot, it's been a lot of work. That's been really interesting. I think part of it is that it's been really great that regulators are looking at this. They are prioritising the need for some type of standardisation in the space. It has forced us to build out our data infrastructure in new ways, and so that we're a little bit more robust now, we're ready to be able to deliver and report on this. I think the question is, is it meaningful reporting? Is it reporting that's going to really help move the needle? Are we putting the resources into the right places?

Freddie Fuller 10:47
Yes, so it's not reporting for reporting's sake, which I suppose leads into the point that you and I have talked about previously, which is, is there a danger that Europe might be seen as being over-regulated and it puts off not only corporates, but also asset managers?

Melanie Adams 11:11
Yes, I think that is a big risk when you look at these types of regulations. Are they meaningful? If they're not meaningful, what is the cost of them? What is the resourcing that is going into being able to build these out? I think on the issuer side, it's a really important question. What is the cost of doing business for issuers in Europe? Is it worthwhile for them?

We've seen some noise around some issuers saying that it's becoming very costly to be based in Europe. It's certainly the same for asset managers as well. When you have different labelling regimes for different funds in the different countries in Europe, it becomes incredibly complicated. Not only can it be expensive and difficult to maintain, but there's a worry that you don't want to be offside in any way. You can do your very best, but with everything changing so quickly, we need to always be mindful of any type of risk that we're taking on.

Freddie Fuller 12:05
Yes. Maybe we can turn our gaze forward and see what your thoughts more generally are on what 2025 might hold. We know in Europe that investors have been shifting their focus very much on a micro level, I suppose, with more of an onus on things like transition investing and thematics of that ilk. There's been a pronounced shift towards engagement, even with the really very heavy emitters, that perhaps wouldn't have been engaged with beforehand.

Also, from a corporate perspective, there have been a number of companies who have shifted their sustainability targets outwards, whether that's net zero or production targets or packaging in relation to the regulations that I talked forward. A little bit different from what's been happening in the US. What does your, again, unfairly proverbial crystal ball suggest to you, both in North America, and perhaps in Europe as well?

Melanie Adams 13:09
I think that 2025 is going to be a really interesting year. I think we're going to see more split between the approach taken in Europe and in the US. We will be obviously watching the US and the backlash very carefully. I think some of the greenhushing or the ESG-hushing, I suppose, more broadly, will be very prevalent in the upcoming year. It's going to be really important as asset managers that we're engaging with the issuers in which we're invested to really fully understand their policies and their practices, because they may not be as forthcoming with those as we would like, as investors.

Then, of course, on the regulatory front, I think we are not as likely to see as much regulation in the traditional sense in the US, but we will see a lot more regulatory activity around attestations, that companies and asset managers are not boycotting particular sectors or industries, product involvement categories. In Europe, of course, we've got the new version of SFDR that we're anticipating. We've got more regulation rolling out along those lines that we're gearing up for and preparing, making sure that we've got all the right resourcing in place so we can properly deal with that.

Freddie Fuller 14:30
Yes, and maybe finally, we can finish by looking at the idea of that backlash taking hold elsewhere. It's something that we think about a lot in Europe. It's very trite to say that Europe is different from North America in this regard, but ultimately, it is. It isn't to say there isn't a certain level of groundswell. Many political parties across the bloc have had some success in this regard, thinking about Germany or the Netherlands and France.

Part of their pitch carefully weaves this anti-ESG and anti-net-zero rhetoric into a broader anti-establishment narrative, I suppose, which has clearly appealed to certain sections of the population that may have felt economically left behind, perhaps justifiably, in the last 10, 15 years or so.

I suppose that there are two questions here. One is, do you feel that this backlash, it is possible for it to grow in other areas in the same way that it has in the US? If that is the case, what is it that governments and regulators can do in different regions to try and ensure that not only society is on board, but also corporates are incentivised to engage with it in this way?

Melanie Adams 15:57
I think that's a great question, Freddie. I think that's absolutely right, that I don't think regions are immune from the backlash. Whenever the pendulum swings very far in one way, there has to be the counter movement of that pendulum. In this particular case, we are seeing a lot of regulation in Europe, and we have heard noise that both issuers and asset managers are feeling the burden of the additional regulatory reporting in this particular space.

It would not be surprising if it's questioned and there is some pushback on that and assessments of how capital is being spent and how corporates are making money and how asset managers are able to deliver information out to clients and others. I think ‘absolutely’ is the answer to the first question.

Now, the second question, on what can governments do to help ensure this doesn't happen. I think really in Europe, the focus has to be on the regulatory framework that has rolled out and the complexity around that and really assessing parts of that, and questioning whether they are adding value, whether they are helping customers, whether they are helping clients, other stakeholders better understand the sustainability risks and opportunities that issuers face, and that asset managers face by holding these issuers in their portfolios.

If we really look at that and do an assessment about whether or not it's worth the resourcing, which data points are in fact the most important that we really should be focusing on and helping ensure that these are the ones that we spend our time and our resources on, I think, can go a long way to helping comfort issuers and asset managers that there won't be that level of backlash in Europe that we've seen in the US.

Freddie Fuller 17:45
Yes, well, it sounds like it's going to be a very interesting 12 months or so, and a lot for both corporates and asset managers to contend with. On that note, we should conclude. Thank you very much, Melanie, for taking the time to join us and for our listeners for tuning in. Goodbye.

Melanie Adams 18:03
Thanks, Freddie.