Over the past year, investors have encountered a series of disruptive storylines. Newsflow around geo-political events, interest rates, and inflation provided reminders of the intricacy of financial markets. In addition, a variety of long-term, structural factors added to the complexity. These factors may not drive day-to-day market movements. However, they have the potential to drive systemic shifts with cascading effects.

Amidst all the headlines, those related to climate change continue to garner significant attention. And it’s little wonder why. The past year, for example, brought devasting floods in Pakistan, droughts in California, and recent wildfires across Canada. Looking ahead, these kinds of events are expected to be most severe several decades from now. In fact, in its 2023 Global Risks Report, the World Economic Forum listed environmental-related risks as being among the most likely and having the greatest potential impact over the next 10 years.¹

At RBC Global Asset Management (RBC GAM), we’ve based our approach to responsible investment upon a core belief that integrating material environmental, social and governance (ESG) factors into our investment process can enhance long-term, risk-adjusted returns. We support this belief by integrating material climate change considerations in our investment decisions, for applicable types of investments.²

To provide an overview of what this entails, this summary highlights some of the ways in which we measure and monitor climate-related risks and opportunities across our portfolios. As we go, we’ll explore the firm-level analysis that was disclosed within our RBC GAM Climate Report 2022.³

Climate change and the long-term investor

Climate change is a pressing issue that may have considerable impact on economies, markets, and societies – posing both financial risks and opportunities for issuers and investors. Climate change may present itself as a financially material consideration in terms of:

1. Physical risks. Rising global temperatures, driven by greenhouse gas (GHG) emissions, cause the physical impacts of climate change. These include increases in the frequency and intensity of extreme weather events and long-term shifts in climate patterns.
2. Transition risks. Efforts to reduce GHG emissions cause the transition impacts of climate change. These are driven by government policies and regulations, increasing legal action and litigation claims, technology disruption and transformation, shifts in supply and demand, and changing consumer and employee expectations related to climate change.

With a variety of factors involved, each spanning different time horizons, understanding the potential investment implications of climate change is a complex task. At RBC GAM, we approach this by using a broad range of climate data to help identify material risks and opportunities.

Considering carbon emissions within our portfolios

Carbon emissions analysis, in our view, is a sensible starting point for assessing climate-related risks and opportunities. It provides a view on the relative exposure of portfolios, sectors, and issuers to transition risks – including those related to policy, market, and technology developments. One of the carbon-related metrics we examine is the Weighted Average Carbon Intensity (WACI), which offers insights on risks and exposures to carbon-intensive issuers.

Key take-away from our carbon emissions analysis

At a portfolio level, the WACI (by sales) is generally driven by sector exposure. The carbon-intensive Energy, Utilities, Industrials, and Materials sectors tend to be the greatest contributors to emissions. These sectors account for 88% of the WACI (by sales) for our equity holdings, across all geographies. Meanwhile, the sector attribution is more concentrated across our fixed income holdings. Here the Utilities and Energy sectors collectively account for 89% of the WACI (by sales).

Figure 1: Weighted Average Carbon Intensity, by sales (inclusive of scope 1 and 2 emissions), by asset class and geography ⁴

Carbon analysis has proven useful in assessing climate-related risks and opportunities. But it is a static and backwards-looking metric. It provides a view on what an issuer’s emissions have been, which does not necessarily reflect what they will be in the future. Nor does it reflect the actions an issuer is taking, or will be taking, to manage potential climate-related risks, or capitalize on opportunities. For this reason, we look to supplement this analysis with forward-looking viewpoints.

Considering climate targets

To supplement carbon emissions analysis, we measure our exposure to issuers who have established carbon emissions reduction targets (climate targets). This applies a forward-looking lens by measuring the relative level of commitment and expected trajectory of emissions for the companies we invest in.

The challenge here is that climate targets can vary significantly. The scope of emissions covered may be different. The emissions reduction targets can be more or less ambitious. The likelihood of the company achieving its target can also vary.

For this reason, we prefer verified targets that meet an established standard. This makes it easier to assess and compare one company’s plans with another’s. In our analysis, we consider science-based (also called Paris-aligned and net-zero) targets if they meet SBTi⁵ approval. RBC GAM also recognizes that not all issuers may choose or be eligible⁶ to apply a voluntary standard such as SBTi. For this reason, we also track and monitor investments in issuers with any carbon emissions reduction targets.

Key takeaways from our analysis

• 35% (US$78.3 billion) of our equity and corporate fixed income investments are in issuers with verified or committed science-based targets (based on SBTi targets).
• 76% (US$172.0 billion) of our equity and corporate fixed income investments are in issuers with a carbon emissions reduction target (includes SBTi verified and committed targets, and other climate targets).

Figure 2: Percent of AUM invested in issuers with a climate target, by asset class and geography⁷

Across geographies, our Canadian and emerging markets portfolios have a lower percentage of investment in issuers with a verified or committed science-based target. These results largely align with the SBTi Progress Report, which identifies these as regions with lower penetration of SBTi targets.⁸

In Canada, the lower coverage is likely affected by the fact that SBTi does not currently accept commitments or provide verification of targets from oil and gas or fossil fuel sectors. These make up a significant portion of the Canadian economy.⁹ Within the Asia-Pacific equities portfolio, 23% of investments are in issuers that have committed to set a SBTi target within the next 24 months¹⁰, largely driven by issuers in China, Hong Kong, and Japan. If successfully implemented, these new emissions reduction targets may reduce carbon emissions for our portfolio investments in the future.

Considering temperature alignment

Carbon emissions and climate targets provide a view on issuers’ emissions performance and commitments. We can supplement this analysis with a look at a portfolio’s implied temperature rise – a modeled, forward-looking metric that indicates what the global temperature rise would be in 2100 if the global economy mirrored the portfolio.

Key takeaways from our temperature alignment analysis

• Most of our equity portfolios have an aggregated temperature alignment similar to their respective benchmark with one notable exception: our emerging markets equity portfolio. This has a lower temperature alignment, stemming from current and typical underweight exposure to the Energy and Materials sectors.
• Across our fixed income holdings, the higher temperature alignment of the Canadian corporate bond portfolio is largely due to sector positioning. This portfolio is underweight in Financials and overweight in Utilities relative to the representative benchmark (FTSE Canada All Corporate Bond Index).

Figure 3: Implied Temperature Rise, by asset class and geography¹¹

It’s worth noting that none of our portfolios, nor their associated benchmarks, currently have a temperature alignment below 2°C. Keep in mind that the goal of the Paris Agreement is to limit global warming to “well below 2°C” by 2100, and to aim to achieve 1.5°C. The latest data, according to the U.N., indicates that the world is currently on a pathway that will fall short of this goal. In fact, the world appears likely to reach a temperature rise between 2.4 to 2.6°C by the end of this century.¹²

That said, our analysis uncovered green shoots on an issuer level. Across our holdings, 45% (US$101.7 billion) of equity and corporate fixed income investments are in issuers with a temperature alignment below 2°C.

Considering climate opportunities

RBC GAM considers the exposure of investments to climate opportunities on a case-by-case basis, for applicable types of investments. We use several third-party datasets to evaluate climate opportunities. This includes analysis of green revenue exposure, issuer investments in low-carbon patents, and the identification of issuers that provide climate solutions.

Key takeaways from our climate opportunities analysis

• 4% (US$9.9 billion) of our portfolios are invested in issuers that provide climate solutions.¹³
• 9% (US$19.6 billion) is invested in issuers with more than 10% green revenue.¹⁴
• 27% (US$60.2 billion) is invested in issuers with some green revenue (more than 0%).¹⁵

A constant evolution

As a global investment manager that is active across regions and capital markets, RBC GAM seeks to anticipate change and manage complexity. The events of the past year have only served to underscore the importance of these efforts, while reinforcing the need for an informed and thoughtful approach to responsible investment.

The integration of ESG factors into our investment decision-making processes remains an important priority for RBC GAM.¹⁶ Over the past year, we’ve focused on expanding the tools that allow us to do this effectively. This includes building out our internal ESG data infrastructure to create customized views of ESG data. For example, we have broadened and deepened our Climate Dashboards, strengthening the insights we’ve provided to our investment teams since 2020 – offering bespoke views on portfolio, sector, and issuer level data.

As a trusted manager of our clients’ assets, it’s our responsibility to consider all material factors that may impact the risk-adjusted returns of our investments.¹⁷ At RBC GAM, we believe that integrating ESG factors into our investment process empowers us to enhance the long-term, risk-adjusted performance of our portfolios. Climate change is one such factor.¹⁶