ESG: A Source of Alpha and Reduced Risk IIES 2017

Transcription

1 ESG: A Source of Alpha and Reduced Risk IIES 2017

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3 RBC GAM 2016 Responsible Investing Survey Results U.S. Institutional Asset Owners, Wealth Managers and Consultants Q: Do you think of ESG as an Alpha Source? Q: : Do you think of ESG as Risk Mitigator? Yes 30% 37% No Yes 33% 40% No 33% Not sure 28% Not sure Only 30% consider ESG as a source of Alpha Only 33% consider ESG as a risk mitigator Source: 2016 RBC Global Asset Management Responsible Investing Survey Report. RBC GAM conducted an online survey to U.S. institutional asset owners, wealth managers and pension plan consultants 1

4 ESG/Responsible Investment What it isn t, What it is ESG is not: Socially Responsible Investing (SRI) Ethical Investing Values-based judgments of a security or sector Negative screening to eliminate companies or sectors Fossil Free or Carbon Light ESG is: Enhanced analysis of companies through ESG integration Better understanding of risk and opportunity Stewardship: proxy voting and company engagement Working with other managers and owners to address ESG issues 2

5 What is Driving the Growth in Responsible Investment? Global Regulations Investor Led Initiatives & Corporate Reporting Standards Link to Performance 3

6 Global Regulations EU EU Shareholder Rights Directive U.S. DOL Guidance for ESG, Proxy Voting & Engagement U.K U.K. Stewardship Code Compliance Global Surge of Stewardship Codes Canada 2016 changes to Ontario Pension Benefits Act 4

7 Investor Led Initiatives & Corporate Reporting Standards 5

8 Link to Performance Empirical Evidence Supports ESG 6

9 Our Approach to ESG ESG is about reducing risk and enhancing returns Tool for identifying/avoiding risk, but also for identifying opportunities We generally don t exclude sectors or securities SRI funds available for investors who want to exclude certain sectors/securities Engagement is more powerful than divestment Our considerable scale uniquely positions us to encourage ESG-related improvements in our investee companies Proxy voting is an important tool to reinforce our engagement efforts 7

10 ESG is Part of our Fundamental Analysis Financial Reports Only Scratch the Surface 8

11 GlassDoor score GlassDoor score GlassDoor score GlassDoor score Strong ESG Can Improve Financial Performance Engaged Employees are More Productive 4.6 Internet , , , ,000 1,100,000 1,300,000 Sales per Employee Selected companies: AOL, Alphabet, Amazon, Baidu, Ebay, Linkedin, Microsoft, PayPal Financials , , , ,000 1,100,000 Sales per Employee Selected companies: Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, UBS, Wells Fargo Scheduled Airlines , , , , , , , ,000 Sales per Employee Selected companies: Air Canada, Alaska Air, American Airlines, Cathay Pacific, Delta Airlines, International Consolidated Airlines, JetBlue, Qantas, Singapore Airlines Personal Products , , , , , ,000 Sales per Employee Selected companies: Avon, Colgate-Palmolive, Coty, Clorox, Kimberley Clark, Newell Rubbermaid, Proctor & Gamble, Reckitt Benckiser, Spectrum Brands, Svenska Cellulosa Competing firms selected by RBC GAM Global Equities industry specialists to show firms with directly comparable business models and with more than 100 reviews on Glassdoor.com. Sales per Employee from Bloomberg. Data as at 28 th Oct

12 ESG Helps Identify Alternative Sources of Value Creation Strong ESG Weak ESG EMPLOYEES Engagement, strong culture, innovation, R&D Lack of training, unsafe conditions, high turnover CUSTOMERS Responsiveness, opening times, dispute resolution No returns policy, poor labelling, over-charging SUPPLIERS Timely payment, production planning, traceability Reputational risk, lack of audit, quality control ENVIRONMENT Emissions control, sustainable sourcing, renewable energy Pollution, high cost carbon reserves, water usage Contingent Asset Contingent Liability 10

13 $ Share Price ESG Factors Impact Target Price UnitedHealth Group UnitedHealth Group ESG Scenario Analysis Business Leading U.S. health insurer ESG Assessment +12% -17% Identified several ESG risks (contingent liabilities) and opportunities (contingent assets) Engaged with management to discuss Determined sensitivity to ESG scenarios Investment outcome ESG asset scenario led to 12% increase in target price Current Price Target Price Contingent Asset Contingent Liability Source: UN PRI A Practical Guide to ESG Integration for Equity Investing, September Page 30,31. ESG liability scenario led to 17% decrease in target price 12

14 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 Price (in GBP) Contingent Liabilities Affect Fixed Income BrightHouse BrightHouse Senior Secured Bonds Price Performance Business Rent-to-own household items, focused on low-income consumer demographics ESG Assessment 90 Reviewed Dec Initiate Position Dec'14: ESG review, decision to reduce/start sell out of position Feb'15: APPG inquiry report Uncovered weak ethical policies/practices Increased political/regulatory risk post payday lender scandals 60 Investment outcome Sold position in Dec Feb Parliamentary inquiry concludes improper industry practices, calls for more regulation Source: Bloomberg, as at January 2017, local currency 11

15 Performance Ratio Engagement is an Important Tool Barrick Gold Barrick s Investors have long had governance concerns Board composition Excessive executive compensation 110% 100% 90% Barrick Gold Share Price Lagged Peers Structural issues as well Poor operating performance Stalled growth projects Highly levered balance sheet 80% 70% 60% 50% Barrick Share Price vs. TSX Global Gold Index 40% Dec-13 Jun-14 Dec-14 Jun-15 Source: Factset, In C$ Returns. 13

16 Performance Ratio The Power of Engagement Barrick Gold Shareholders concerned with several issues Shareholders voted against Say-on-Pay twice in three years Issues relating to community engagement and license to operate 2015 Shareholder Proposals Nominate independent directors with mining expertise to the Board Improve governance structure 140% 130% 120% 110% 100% 90% Barrick s Share Price Improved Written commitment to address issues raised, including significant changes to executive compensation 80% 70% Barrick Share Price vs. TSX Global Gold Index 60% Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Source: Factset, In C$ Returns to Dec 31,

17 Fossil Fuel Divestment An option when stakeholders perceive Engagement to be insufficient Who has committed to divest? Faith-based organizations Philanthropic organizations Foundations & Endowments Pensions History of other Divestment initiatives Military Gambling Nuclear South Africa Tobacco Fossil Fuel RBC Investor Survey Q: Do you believe the Fossil Fuel movement is an investment fad or a lasting investment issue? 26% It s a fad 12% It s more than a fad 62% It s a lasting investment issue 0 20% 40% 60% Source: 2016 RBC Global Asset Management Responsible Investing Survey Report. 15

18 Perspectives on Divestment Motivations or Goals Moral/Social Environmental Financial Oxford Study on Impact of Divestment Limited direct impact on equity or debt Divested holdings bought by neutral investors Most effective at stigmatizing companies May lead to legislative or regulatory change Oxford Study: Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets? 16

19 Percentage of votes FOR Proxy Voting An Important Part of Fiduciary Duty Provides a method of conveying views on governance of investee companies Voting Guidelines actively reviewed as governance best practices constantly evolve 80% 70% 60% 59% Support for Shareholder Proposals 61% 54% 50% 47% 40% 30% 20% 10% 0% Compensation Corporate Governance Health & Environment Social & Human Rights Source: RBC GAM CGRI 2016 Annual Report. Proxy Voting results from January 1 December 31,

20 Percentage of votes FOR Proxy Voting An Important Part of Fiduciary Duty Provides a method of conveying views on governance of investee companies Voting Guidelines actively reviewed as governance best practices constantly evolve 80% Views on Executive Support Compensation for Shareholder and Board Proposals Independence Expressed 70% 50% 59% 61% Require an Independent Board Chairman 60% Votes FOR Amend/Approve Option or Stock Plan 47% 54% Votes AGAINST Management 40% 30% 100% 94% 20% 10% 6% 0% Compensation Corporate Governance Health & Environment Social & Human Rights Source: RBC GAM CGRI 2016 Annual Report. Proxy Voting results from January 1 December 31,

21 Information Sources Visit the UN PRI website at Guides available for integrating ESG across different asset classes CFA Institute: ESG Issues in Investing: A Guide for Investment Professionals at Visit Phillips, Hager & North Investment Management webpage at institutional.phn.com Visit the RBC GAM Corporate Governance & Responsible Investment webpage at Visit the RIA Canada website at 18

22 Disclaimer This presentation is intended for institutional investors only. This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard. PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors or omissions. The views and opinions expressed herein are those of PH&N IM as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail. Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past performance may not be repeated. The amount of risk associated with any particular investment depends largely on the investor s own circumstances. Investors should consult their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation. This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forwardlooking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility. PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North (PH&N) investment funds. RBC GAM Inc. is registered with the various securities commissions of Canada as a portfolio manager, which permits it to provide discretionary investment management services to its clients, and as an exempt market dealer which permits it to act as a dealer for prospectus exempt trades in certain circumstances. RBC GAM Inc. is also registered as an Investment Fund Manager in Ontario, British Columbia, Quebec and Newfoundland and Labrador and as a Commodity Trading Manager in Ontario. Each of RBC GAM Inc. and BlueBay Asset Management LLP (BlueBay) is a wholly-owned subsidiary of Royal Bank of Canada, and an affiliated company and may be considered as related issuers and/or connected issuers under applicable securities legislation. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc., IC

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