Welcome back to The Institutional Beat podcast, where we discuss interesting and relevant topics for institutional investors. My name is Haley Hopwood and I am your host for today's episode where we are going to talk about responsible investing. Now, this is a topic that has become quite political over the past couple of years, but it does remain an area of strong interest for many of our clients.

And so we're going to spend some time talking about it today and focusing our conversation on some of the key trends shaping responsible investing for 2026. Joining me to have this discussion today is Melanie Adams, who is the Head of Responsible Investment at RBC Global Asset Management Inc. Melanie, thank you so much for being here.

Thank you so much for having me, Haley. I'm really glad to be here.

Our pleasure. Now, Melanie, your team published a thought piece recently highlighting several key trends for 2026. We're not going to cover all of those trends, but we're going to tackle a couple with the first being AI. Now AI capabilities are advancing at what seems to be a breakneck speed. But at what cost?

At what cost to fairness? At what cost to accuracy as well as the environment? So we're going to get into that in a little bit. We're also going to talk about defense. So global tensions are obviously high. There's active conflicts across the globe. And this is really driving a fundamental rethinking of defense sector investments. And then lastly, we're going to talk about climate because the gap between climate risks and our preparedness to be able to handle those is something that's becoming a lot more expensive and quite obvious at this point in time.

So lots to discuss. Let's dive right in and I'm going to start with a fairly broad-based question. If you had to pick one trend that keeps you up at night and also excites you the most, what would that be and why?

And that’s a great question. And I would say with the lens of where we are currently in the responsible investment space and what's coming and what's new and what we've got a good handle on and what we don't.

I would probably say AI because it is so new, it's so broad, there are so many implications, whether it's on the governance issues that that have come up, whether it's about the deployment and some of the environmental issues that have come up, and also the opportunities for companies and for individuals to change the way they work. I think that's really exciting.

So I think that's probably the one I'm thinking about the most these days.

Well, I had a feeling that you might pick AI it was a little bit of a leading question, I guess, after all. Okay. So why don't we start there? Because AI really does touch everything as it relates to responsible investing. The environmental, social, and governance.

So, the E, the S and the G. Presumably AI is dominating boardroom conversations right now. What is your read on this tension between racing to deploy AI and managing risks around fairness, bias, and accuracy? Are companies managing to strike the right balance?

It's a great question and it's still very early in this. There is clearly a lot of pressure on companies to be very, very active, to be ahead in using AI in their business, to be creative in how it's being used, to find areas where costs can be reduced as a result of AI.

But of course, there are issues. As we know there are hallucinations with AI. It's not perfect. We need, in most cases, some level of human oversight as well. And then there are also some of the risks around what that governance looks like. What should it look like at the board level? What is the board's role and responsibility in overseeing the AI program? Which is a bit different.

It's brand new. It's a bit different from technology in any other way that we've thought about it before. I think a lot of the risks – we don't know what they all are. We're seeing this unfold in live time. And I think what's a lot of concern is that it's unfolding very, very rapidly.

And are our boards keeping up? Are companies able to keep up with the governance that's required around this? If you if you talk to people in governance or our AI circles, there's still a big question mark around what are best practices for boards. What should we as investors be expecting of the companies that we're invested in when they're thinking about these types of risks?

Yeah. So perhaps not quite finding that balance yet. Still a lot of evolution to come in that area.

Absolutely.

So why don't we shift to the environment? There's a fascinating statistic in your publication, which is that nearly a quarter of data centers are in water-stressed regions. And obviously, this is significant because data centers require a lot of water for cooling and other things.

Are investors truly grasping the scale of AI's environmental footprint, or is this something that's flying under the radar?

This is something that investors are fully aware of or have been tracking and following. And it's part of the conversations in our engagements with companies. But partly because we have been looking at climate risks for a long time as investors, generally speaking, we look at companies and this falls as part of those types of risks and what companies are doing. However, it is one of the issues that we're talking about with AI, but it's moving so rapidly that it's not always front and center.

When we go in and talk to companies about AI, it's really more about the impact on their business, specifically, and how they're thinking about using it and the governance around that, as opposed to some of these other issues on the environmental side. Now, we have seen in some instances communities starting to push back when data centers are being proposed in those regions.

And so I think we're going to see some activity from investors, but maybe we're not going to be the loudest voices in the room. But I think maybe some of these communities will be. And that'll be important for companies because it should matter to companies what their impact is on the communities in which they're operating. And so I think we'll see that play out overtime.

And maybe that, you know, at some point turns into regulatory and whatnot as well, right?

Absolutely, absolutely. We're still early days in what the regulations in this space look like.

Okay. Now what about workforce disruption? You know, we're hearing about these fears of workforce disruption.

And you know there is maybe some of that creeping into some of the unemployment numbers these days. Are companies proactively addressing AI's impact on their employees or is this becoming a ‘we'll deal with it later’ sort of problem? What should investors be looking for here? Because obviously there's both pros and cons.

I think right now there's an anticipation that it might help reduce costs.

We've seen some of that, probably, that we could attribute back to AI so far. We do expect that there will be some more. I think companies are not as focused on this as they should be. I think a really important area is the psychological impact on younger workers coming into the workforce. If a lot of the work that you do when you're first starting out is being taken over by AI, how do you train?

How do you learn skills? How are you supposed to build the capabilities you need to progress throughout your career? And I really do think that we have an onus on ourselves. And every company has an onus on themselves to think about that because there's great societal benefit in having young people trained as part of the workforce going forward.

So how are we going to do that? What type of retraining? What type of skill development are we going to make sure that we are bringing to new folks that are just entering the workforce for the first time? We just want to also understand what are the policies that companies have around this, what are the HR policies?

Are they strong and robust? And how are companies thinking about this? That's a topic that we use or we talk about a lot when we engage with the companies in which we're invested. I still think, again, on this particular topic, though, it is still early days as well here.

Now, before we shift gears, a question that we've been getting a lot from clients is how are our investment teams using AI on a day to day basis, and how, as a firm, are we ensuring that we have the proper guardrails in place? Now, I know we can't really get into what all of the investment teams are or are doing, but perhaps you could answer this from the lens of what the responsible investment team is doing as it as it relates to AI.

Yeah, we are doing quite a bit within RBC GAM and within RBC, the broader enterprise as well. There's been a lot of activity on AI and how it can be used to more effectively meet our responsibilities. We're doing a lot in terms of efficiencies and how to make some of our more mundane tasks faster and easier.

So this is sort of the efficiency stream, and we're looking at how we can use it as well to help with our assessment of different companies. And I can give a quick example on the responsible investment team. We have been building different agents to look at climate strategies of different companies and how effective they are, and testing the robustness of the different climate strategies.

So there's been some work in those areas. We're still also working through it. It’s not perfect yet, but it's certainly a tool that can be used to help. It's not replacing humans. We still need the human element to look at this and to assess what the results are. But it can certainly help synthesize some of the information that's available out there for us.

And we do have the broader RBC enterprise, as you've mentioned, where there is some pretty strict guardrails and restrictions I know that have been put in place in terms of how AI has been deployed for all of us. For instance, we only use internally developed AI systems.

Oh, absolutely. And I should have mentioned that as well. RBC has been very, very careful to make sure that client information is very, very well protected.

We're within our own ecosystem here and how we deploy AI. And that's been very comforting to know that we do have our own ecosystem within which we can work very safely.

Yeah, certainly.

Why don't we switch gears now and talk about defense? Global tensions are high. We are seeing a lot of active conflicts right now.

And we've seen many countries ramp up defense spending in what is becoming increasingly a power-based geopolitical landscape. Now, your piece calls out something interesting happening in the EU where funds are reconsidering exclusionary policies around defense. How significant is this shift? And is this something that we might see outside of Europe as well?

Yeah, this is a really important topic, obviously, with what's going on globally right now. Defense and companies that are involved in defense in this sector have become a source of discussion.

It's a huge opportunity to be invested in this space with all the capital that's being deployed there. But historically, it has been a problem in Europe. A lot of funds that have been classified as more ESG-oriented or Article 8 have often in Europe, not invested in weapons-type companies. And now there's different categories of weapons, whether they're controversial weapons, general weapons, etc. and there's different levels of that.

But what we have seen in Europe is actually a significant movement away from this because of the opportunity to invest in defense. And I think what this shows us is something that we see often in the ESG space. It's very nuanced, and there are different sides to every part of that. And when you look at defense, you can see why these companies would have been screened out because they're controversial.

They may have had civilian impacts. But then on the flip side of that, we care about sovereignty. We care about protecting sovereignty. We care about human rights. We care about these different issues. And so, as can be the case in a lot of these ESG assessments, and this is why it's really important to have an active manager who's looking at an issue holistically and thinking about all of these kinds of factors.

It's very, very complicated. And so we are seeing this big shift in Europe. We're not seeing this in other parts of the world, but only because other parts of the world didn't have the same starting point as Europe. Other parts of the world were not screening out weapons to the same degree that Europe was. And so, we're not seeing any requirements to shift to meet the opportunity moment or to make sure that we're considering the other parts of the social factors that come from investing in weapons.

But that's a very, very big topic of conversation right now in Europe.

Now you mentioned that it's quite nuanced. Here in this next question, I think gets at that as well because the piece that you guys put out talks about this blurring of the lines of what even constitutes a defense company as tech firms are entering this space in a bigger and bigger way. How should investors be navigating this complexity?

It is really, really challenging. I mean, that's a really great question, Haley, because they say now technology – that is the weapon. Drones and other types of technology are being used, and those will help win wars. Cyber security is really important as well. But even without the technology, it was already complicated to start with because a company might be making a component part that is used in weapons.

And we would be looking at well, is this company making this because it's intended to be used in weapons? How far upstream and downstream do we look at these weapons and how they're being produced? What about storage of them? What about transportation of weapons? And so what is a company's involvement in the overall picture? It can be quite complex.

And usually when you're looking at that, you're looking at its revenues from this area and then adding the layer of technology over that or technology's use for many, many different reasons. And so, to attribute it to defense can be very, very challenging. It's becoming a more and more complicated space to draw lines or to think about it in that way.

And I think again, it's all about active management and doing individual assessment of each issuer and what their exposures are, what their risks are, and opportunities too.

Okay. Well, why don't we move on from defense and talk about climate? We are seeing some pretty significant physical impacts from climate just across the globe.

I think maybe one of the most obvious ones is the LA wildfires in 2025. But there's quite a number of others as well. Your publication highlighted significant economic losses coming from these extreme weather events. But what I thought was most interesting is that less than half of that value is being insured. That's pretty significant. And to put it bluntly, who's eating those losses?

And do investors understand that this is ultimately coming out of corporate earnings and asset values?

Yeah, I mean, it's quite remarkable how little insurance there has been in this space and how quickly we've shifted into the physical impacts from climate. Investors do understand that. I think what is a little bit less understood as well, though, is everybody's bearing the cost of these. Prices are being passed on to consumers as well in the form of higher prices on goods and services to make up for these types of losses that companies are experiencing.

So that's one of the things we're talking often to companies about when we engage with them. It's part of the climate strategy. How are you thinking about the transition risks, the policy, the regulation in that space? What are the impacts on their products? What are their upstream and downstream implications? But also, how are you ensuring this? What happens if there is a physical risk?

What are you exposed to? Is a wildfire risk for your company? Is there flood risk? Are there any other types of physical risks and how are you protecting yourself in those circumstances? That's a really important part of any climate strategy.

It's obviously becoming increasingly important because I think historically the focus has been more on transition risks.

So talking about things like carbon pricing and stranded asset potential and regulatory changes and impacts there. But you know, physical risk is demanding more attention right now. How do we balance that? Is one more important than the other or are they two sides of the same coin?

Yeah. Initially the focus was on transition risk.

And transition risk is really about policies, carbon pricing, different types of regulations that can actually help stop reduce emissions so that we could make the 1.5 degree increase. As we start to increasingly see that we're not on track, we are looking now at the physical risk and we're starting to see the physical risks. And so what's really important about this is that they impact companies differently.

Some companies have more exposure to transition risk to different policies. Some companies – and particularly where there's more physical premises – are more exposed when we move into the physical risks. And they can be very different. They're very differently measured. They need to be very differently managed. And the implications for different sectors and different companies can be quite different.

But we have sort of shifted a little bit, I think transition risk is still incredibly important. There's still a lot that can be done in that space. But we need to be very aware of the physical risk component of it and what this means for the issuer companies in which we're investing.

Yeah, and I know your team has done a lot of work in this area too, with research and scenario analysis.

So it is comforting to know that our investment teams have this information at their fingertips when they're making decisions.

We try to stay on top of it. But there is a lot. There's a lot going on. There's a lot globally in the ESG space. The messaging might feel a little bit muted.

Maybe we're not talking about it quite so much. But the challenge has remained the same. And understanding these risks and opportunities hasn't changed at all for us. We're still here and doing the assessments, doing the work, thinking about this as part of the investment team processes, because it's still there, whether or not we're shouting it out or quietly doing the work.

Well, Melanie, we are nearing the end of our discussion, but I do have one last question for you. Last year, one of your key themes was this swinging of the ESG pendulum with significant anti-ESG sentiment coming out of the U.S. in particular. Where does that pendulum sit in 2026? Has it swung back, or are we still in that same place?

Well, when we think about the classic pendulum, it sorts of swings back and forth from one direction to the opposite direction. I would say right now that the pendulum is swinging in all directions – maybe circular, up and down. It's just everywhere. Even within the anti-ESG sentiment in the U.S., we're starting to see a lot of pushback.

We're starting to see, just in the way of lawsuits, where investors are suing companies when they can't get their shareholder proposals on the ballot. We are seeing just a lot of activity in this space within regions where there's been ESG pushback or even the other way – where regions have had a lot of momentum looking at these types of risks and opportunities, where now things maybe are slowing down a little bit from what they once were, or at least being reassessed and thought through.

And a great example is when we talked about the defense sector in Europe and what that means. And so I think pendulum is all over the map now, Haley. But it's exciting. It's a great place to be. There's a lot of work to be done, and it makes it really even more important than ever.

Yeah, definitely. Well, a world full of complexities right now, for sure. And I think obviously from everything that we've talked about today, we're clearly navigating more risks than ever. But also, as you've noted, a lot of opportunities to come from this as well. And I think maybe one of the big takeaways for institutional investors is pretty clear.

Make sure you – and by extension, your investment managers – are prioritizing and properly incorporating ESG considerations because the downside risks are just becoming too obvious and too material at this point in time. So, Melanie, thank you so much for joining me. This has been a fantastic conversation. I really appreciate having you on.

Thank you so much for having me. I hope you invite me back. This is great.

Okay. Amazing. We will take you up on that offer. And big thank you to all of our listeners out there. We hope you enjoyed the episode today, and we hope you can join us again next time.

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Where our investment teams do integrate ESG factors, the weight given to ESG factors in an investment decision depends on the investment team’s assessment of that ESG factor’s potential impact on the performance of the security and/or the fund. Where ESG factors are not part of the investment objective, ESG factors are generally unlikely to drive investment decisions on their own, and, in some cases, may not impact an investment decision at all.