RBC Global Asset Management | Advisor.ca

Making connections: Biodiversity and climate change

officebureau — Mon, 22 Nov 2021 18:00:48 +0000

PAID CONTENT

While it is hard to ignore the increased attention on climate change over the past months and years, there is another story that has been emerging alongside it: the role of biodiversity in enabling climate mitigation and enhancing climate adaptation.

The connection between biodiversity and climate change mitigation and adaptation is driving increased focus and attention on identifying, measuring, and managing nature-based risks and solutions. The year 2021 has been a pivotal year not just for climate change but for biodiversity as well, and we expect this trend to continue.

Did you know?

The role of biodiversity and functioning ecosystems in addressing climate change is included in the Paris Agreement and will be discussed at the upcoming United Nations Climate Change Conference (COP26) in November 2021.
A new global biodiversity framework has been released by the United Nations Convention on Biological Diversity and is expected to be adopted at the UN Biodiversity Conference (CBD COP 15) CBD conference (COP15) in two parts, in October 2021 and April-May 2022.
Biodiversity loss has been identified as a top 5 global risk for two years in a row by business leaders in the annual Global Risks Report 2021.¹
The G7 Environment and Climate ministers announced in May 2021 a shared commitment to protect 30% of land and 30% of oceans by 2030 (30×30 initiative).²

Why does biodiversity matter?

Biodiversity provides the foundation and infrastructure for nature; simply put, it is the variety of all life on Earth, in all of its forms and functions. It encompasses plants, bacteria, animals and humans. According to the World Economic Forum, more than half of the world’s GDP, around US$44 trillion, is moderately or highly dependent on nature and its services.³ These services upon which economies, markets, and society depend include food, pollination, water, clean air, medicines, fuel, flood protection, carbon sequestration, and a remarkable range of goods and services that we use on a daily basis.

The value and contributions of nature and biodiversity to the economy is garnering increased attention from governments, economists, companies, and investors. In 2019, the U.K. government commissioned an independent global review on the economics of biodiversity with the resulting report (The Dasgupta Review⁴) published in February 2021. This report demonstrates in painstaking detail the direct and close connection between nature and economic prosperity. One of the report’s key insights lies in its description of “natural capital” – which includes all of the benefits and services provided by biodiversity – as an economic asset, much like produced or human capital (see diagram⁵). Just as the loss of human capital can lead to tangible financial loss, the report argues that the loss of natural capital has a material macroeconomic and financial impact to economies.

Threats to natural capital include food production, over exploitation of natural resources, pollution, population growth, and climate change. Agricultural expansion and intensification are the main causes of biodiversity loss, and are expected to increase as the demand for food and bioenergy grows alongside a rapidly growing population. The dynamics of trade and supply chains are also among the key contributors to biodiversity loss, as production often shifts from developed countries with environmental regulations in place, to developing countries, which are often home to higher biodiversity and fewer restrictions. Research suggests that 33% of biodiversity impacts in Central and South America and 26% in Africa are driven by consumption in other regions.⁶

How does biodiversity impact climate change and vice versa?

The connection between biodiversity and climate change goes both ways. Biodiversity contributes to and enhances climate mitigation and adaptation while climate change can lead to degradation and loss of land and marine biodiversity. This connection is the basis for growing emphasis on maintaining and restoring biodiversity and ecosystems as part of broader climate change targets and objectives.

Impacts of biodiversity on climate change:	Impacts of climate change on biodiversity:
• Biodiversity is important for carbon sequestration with carbon stored in trees, soil, peatlands and other terrestrial landmasses. • Marine ecosystems play an important role in absorbing emissions and heat, thereby helping to mitigate climate change. The ocean is estimated to have absorbed approximately 30% of human-made emissions.⁷ • Healthy and biodiverse ecosystems improve the ability to adapt and be resilient to natural disasters. E.g. floodplains and wetlands offer protection from floods; coral reefs, seagrass and mangroves buffer coastlines from waves and storms; forested slopes protect against landslides, and more.	• Rising temperatures and changes in precipitation shift animal and plant habitats, growing seasons, and population size, leading to species die-off and extinctions. • Ocean warming and acidification affects fisheries, coral reefs and other marine life upon which businesses and communities depend. • Changing climate patterns lead to an increasing frequency of pest and disease outbreaks (e.g. Mountain Pine Beetle, Lyme disease). • Climate change affects the diversity of crops, yields and growing seasons with significant potential impacts on the agriculture sector and global food security.⁸

Impacts of biodiversity on climate change:

Impacts of climate change on biodiversity:

• Biodiversity is important for carbon sequestration with carbon stored in trees, soil, peatlands and other terrestrial landmasses.

• Marine ecosystems play an important role in absorbing emissions and heat, thereby helping to mitigate climate change. The ocean is estimated to have absorbed approximately 30% of human-made emissions.⁷

• Healthy and biodiverse ecosystems improve the ability to adapt and be resilient to natural disasters. E.g. floodplains and wetlands offer protection from floods; coral reefs, seagrass and mangroves buffer coastlines from waves and storms; forested slopes protect against landslides, and more.

• Rising temperatures and changes in precipitation shift animal and plant habitats, growing seasons, and population size, leading to species die-off and extinctions.

• Ocean warming and acidification affects fisheries, coral reefs and other marine life upon which businesses and communities depend.

• Changing climate patterns lead to an increasing frequency of pest and disease outbreaks (e.g. Mountain Pine Beetle, Lyme disease).

• Climate change affects the diversity of crops, yields and growing seasons with significant potential impacts on the agriculture sector and global food security.⁸

How does biodiversity impact companies and profits?

The profitability and long-term survival of a number of business sectors and activities depend directly on biodiverse and well-functioning ecosystems.⁹ For example, fresh water is critical to many businesses, including agriculture, mining, and food retailing; genetic diversity in nature is critical to the pharmaceutical industry; and intact wetlands and forests protect buildings and infrastructure from flooding, storms, and natural disasters.

Examples of biodiversity’s contribution to key industries include:

Pollination services for agricultural industries: US$235-577 billion worth of annual global food production relies on the direct contributions of pollinators.¹⁰
Forest products for the timber, pulp, and paper industries: Forest products account for US$247 billion in global trade exports.¹¹
Water supply for consumer goods industries: The garment and footwear industry is responsible for (and depends upon) around 20% of global wastewater use.¹²
Coral reefs for ecotourism industries: Well-functioning coral reefs have generated US$36 billion in global tourism value per year.¹³

Biodiversity-related risks to businesses manifest themselves primarily through the dependency and impacts businesses have on biodiversity, described in more detail in the list below.¹⁴ These risks can affect value chains, increase the cost of inputs and raw materials, disrupt operations, result in legal fines or liabilities, and ultimately affect operations and profitability.

Ecological risks are mainly operational risks associated with resource dependency, scarcity, and quality. They may be linked to increased raw material or resource costs, deteriorated supply chains, or disrupted business operations.
Regulatory risks include restrictions on land and resource access, clean-up and compensation costs, procurement standards, and licensing and permitting procedures or moratoriums on new permits.
Reputational risks relate to consumer preferences and expectations, which can lead to boycotts (e.g., palm oil, Bluefin tuna) and lost brand value.
Market risks may arise due to changes in consumer preferences or new requirements, which impose additional risks to companies if they cannot be met.

Some industry organizations have suggested that biodiversity loss can also be viewed as a potential systemic risk.¹⁵ A systemic risk is a risk that a single event will trigger widespread impacts across financial markets, geographies, and society. The sub-prime mortgage crisis of 2008 and the COVID-19 pandemic are generally viewed as systemic risk events.

How do you measure and manage nature-related financial risks?

Approaches for measuring, monitoring, and managing natural capital and nature-related financial risks are the subject of increasing interest and attention. A significant step forward in these efforts was the establishment, in September 2020, of a new global Taskforce on Nature-Related Financial Disclosures (TNFD). The TNFD seeks to establish a framework for companies to measure and disclose their nature-related financial risks and opportunities, building off of the success of the Taskforce on Climate-Related Financial Disclosures (TCFD), released in June 2017. The TCFD recommendations are mandatory in the U.K. for financial and non-financial sectors of the economy by 2025, and have currently been applied voluntarily by 2,300+ companies from 88 countries.¹⁶

Despite this and other progress in defining nature-related financial risks, there is still much work to be done in both establishing effective metrics for measuring the financial impacts of nature-based risks and opportunities, and in collecting the required data to calculate these. For investors, considering the impact of material nature-related financial risks on the risk-return profile of investee companies, and the actions they are taking to manage and mitigate these risks, is an important part of the investment process.

What are nature-based solutions and what role do they play in climate change?

Nature-based solutions refer to any project or action that protects or restores natural ecosystems in order to address issues such as biodiversity loss, soil erosion, water scarcity, or forest degradation. Just as awareness of the connection between biodiversity and climate change has increased, so too has the focus on the role of nature-based solutions. According to the World Economic Forum, nature-based solutions could generate up to US$10.1 trillion in annual business value and create 395 million jobs by 2030.¹⁷

The role of nature in storing carbon and providing natural defences against floods, storms, and other disasters is essential to efforts to mitigate and adapt to climate change. As companies and countries seek to reduce greenhouse gas (GHG) emissions and meet their climate commitments, their goals will require enhanced investment and action to restore biodiversity and ecosystems. Given that agriculture, forestry, and land use alone account for approximately 23% of global GHG emissions,¹⁸ the potential impact from the protection, restoration, and sustainable use of forests, grasslands, wetlands is considerable.

Government collaboration and regulation is also starting to drive action on biodiversity and the advancement of nature-based solutions. The draft global biodiversity framework that is being considered at the Convention on Biodiversity will seek agreement from participating countries on the percentage of emissions reductions that each country will achieve through nature-based solutions. In the European Union (EU), regulations that were established to support the implementation of the European Green Deal include “the protection and restoration of biodiversity and ecosystems” as one of the six environmental objectives for sustainable economy activities under the EU Taxonomy.¹⁹

What is RBC GAM’s approach to integrating ESG?

At RBC Global Asset Management (RBC GAM), every investment team evaluates ESG factors as part of their investment decision-making process. This includes consideration of factors such as biodiversity and land use, natural resource use, water stress, sustainable forest management and other factors, when financially material to a sector or issuer. We also convey our views through thoughtful proxy voting and engagement, and provide details on how we vote proxies on issues in our Proxy Voting Guidelines. RBC GAM believes that being an active, engaged and responsible owner empowers us to enhance the long-term, risk-adjusted performance of our portfolios and is part of our fiduciary duty.

Read more on how we address climate-related risks or learn more about responsible investment.

1. The Global Risks Report 2021, World Economic Forum, January 2021 2. UK secures historic G7 commitments to tackle climate change and halt biodiversity loss by 2030, G7 UK 2021, May 2021 3. Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy, World Economic Forum, January 2020 4. The Economics of Biodiversity: The Dasgupta Review, Government of United Kingdom, February 2, 2021 5. The Economics of Biodiversity: The Dasgupta Review, Government of United Kingdom, February 2, 2021 6. Increasing impacts of land use on biodiversity and carbon sequestration driven by population and economic growth, Nature Ecology & Evolution volume 3, pages 628–637 (2019) 7. Oceans absorb about 1/3 of global CO2 emissions, but at what cost?, World Economic Forum, March 2019 8. UN/DESA. Policy Brief #102: Population, food security, nutrition and sustainable development, United Nations, April 2021 9. Biodiversity: Finance and the Economic and Business Case for Action, Prepared by the OECD for the French G7 Presidency and the G7 Environment Ministers’ Meeting, 5-6 May 2019 10. Assessment Report on Pollinators, Pollination and Food Production, IPBES, 2016 11. FAOSTA, Forestry database, 2017, 12. UN launches drive to highlight environmental cost of staying fashionable, United Nations, 2019 13. Mapping the global value and distribution of coral reef tourism, Marine Policy, Volume 82, 2017, Pages 104-113 14. Biodiversity: Finance and the Economic and Business Case for Action, Prepared by the OECD for the French G7 Presidency and the G7 Environment Ministers’ Meeting, 5-6 May 2019 15. Investor action on biodiversity: A discussion paper, UN PRI, September 2020 16. Taskforce on climate-related financial disclosures, accessed August 6, 2021 17. New Nature Economy Report II: The Future of Nature and Business, World Economic Forum, July 2020 18. IPCC Special Report on Climate Change, Desertification, Land Degradation, Sustainable Land Management, Food Security, and Greenhouse gas fluxes in Terrestrial Ecosystems, 2019 19. EU taxonomy for sustainable activities, European Commission

This document is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This document does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. This document is not available for distribution to investors in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

Additional information about RBC GAM may be found at http://www.rbcgam.com.

This document has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate and permissible, be distributed by the above-listed entities in their respective jurisdictions.

Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc., 2021

Publication date: October 6, 2021

Net-zero greenhouse gas emissions: Changing investor attitudes

officebureau — Mon, 11 Oct 2021 16:00:00 +0000

istock / TebNad

PAID CONTENT

When it comes to addressing climate change, companies are seeing increasing demand for action from their shareholders. The Harvard Law School Forum on Corporate Governance reports that in the United States, average investor support for environmental shareholder resolutions rose to 41% in the first half of 2021, up from 32% in 2020.¹ Support for environmental resolutions may remain a minority position, but it is one that looks to be rapidly growing.

One way for asset managers to approach the climate change risks and opportunities faced by their investee companies is through thoughtful proxy voting on climate-related shareholder proposals. Historically, RBC Global Asset Management (RBC GAM) has generally seen climate-related shareholder proposals requesting that companies report on their sustainability initiatives. Although we continue to see these shareholder proposals, we have also seen proposals asking that companies consider climate change more holistically throughout the company’s overall strategy.

RBC GAM supports the principles of the Paris Agreement and the international goal of holding global warming to “well below 2°C.”² Scientists agree that in order to meet this goal, GHG emissions must decline by at least 7.6% annually between 2020 and 2050, and achieve net-zero by mid-century.³ RBC GAM also recognizes and supports the need to achieve a just transition to a low-carbon economy that boosts economic prosperity while simultaneously safeguarding equality. Getting there will require substantial commitments from the private sector.

Investors have continued to request that companies enhance their disclosure and policies on climate change-related risks and opportunities. Over the past year, we saw a rise in government and corporate commitments to net-zero greenhouse gas (GHG) emission targets. Consistent with this trend, this proxy voting season, we saw a number of shareholder proposals requesting companies specifically adopt net-zero GHG emission targets or report on how their current policies align with a net-zero ambition.

Many companies already have plans, or are actively developing plans, to reduce their GHG emissions. However, in cases where a company may be lagging in this area, one way for shareholders to direct attention to this topic is through a shareholder proposal. This year we saw Imperial Oil – a large oil and gas producer in Canada – receive a Climate Action 100+ flagged shareholder proposal requesting that the company adopt a company-wide goal to achieve net-zero GHG emissions by or before 2050. Although the company has a short-term target to reduce its GHG emissions by 2023, it was falling behind peers on adopting long-term targets. In addition, with Canada’s commitment to having net-zero GHG emissions by 2050, there was increased regulatory risk that the company might not be ready to adapt in the event of new regulation for the energy sector. RBC GAM generally supports shareholder proposals requesting that companies adopt or implement initiatives to reduce GHG emissions where the company has not already made commitments, and was supportive of this shareholder proposal.

As investee companies create their strategic plans to reduce GHG emissions, it can be challenging for investors to determine which companies’ plans are feasible and how they are progressing on their stated goals. This is why Climate Action 100+ created a list of disclosure assessment indicators to gauge how focus companies compare against this benchmark. The indicators include ten key assessments, which include whether the companies have set net-zero carbon emissions targets by 2050, and whether they report in line with the Task Force on Climate-related Financial Disclosures (TCFD).⁴ This season, we saw a number of Climate Action 100+ focus companies receive shareholder proposals requesting disclosure on meeting the criteria of the net-zero GHG emissions indicator.⁵

For example, the world’s largest construction equipment manufacturer, Caterpillar, received such a shareholder proposal. The company made significant progress on reducing its GHG emissions through 2019 but did not have a GHG reduction target past 2020. Further, it was concluded that, as of January 2021, the company did not meet any of the Climate Action 100+ net-zero benchmark indicators. RBC GAM generally supports shareholder proposals requesting enhanced disclosure on climate-related risks and opportunities, and therefore felt that a supporting vote for this shareholder proposal was warranted.

For more information on our climate change initiatives, please refer to Our approach to climate change or read the full 2021 CGRI Semi-Annual Report.

¹ Harvard Law School Forum on Corporate Governance, 2021 Proxy Season Review: Shareholder Proposals on Environmental Matters, August 11, 2021. https://corpgov.law.harvard.edu/2021/08/11/2021-proxy-season-review-shareholder-proposals-on-environmental-matters/ ² The Paris Agreement, United Nations Climate Change. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement ³ The Emissions Gap Report, United Nations Environment Programme, November 26, 2019. https://wedocs.unep.org/bitstream/handle/20.500.11822/30797/EGR2019.pdf?sequence=1&isAllowed=y ⁴ Climate Action 100+, “Net-Zero Company Benchmark”, 2021. https://www.climateaction100.org/progress/net-zero-company-benchmark/ ⁵ Climate Action 100+, “2021 Proxy Season: Climate Action 100+ flagged shareholder resolutions”, 2021. https://www.climateaction100.org/approach/proxy-season/

Additional information about RBC GAM may be found at http://www.rbcgam.com.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Publication date: September 21, 2021

Climate change: Active stewardship vs. divestment

officebureau — Mon, 27 Sep 2021 16:00:45 +0000

istock / krblokhin||

PAID CONTENT

At RBC Global Asset Management (RBC GAM), we believe that climate change is a material and systemic risk that has the potential to impact the global economy, markets and society as a whole. In 2020, we took steps to formalize our work to address climate change with the launch of Our approach to climate change. A cornerstone of this approach is active stewardship.

In this article, we will explain what active stewardship is and how it can be used to address concerns about climate change. We will also discuss the role of active stewardship versus divestment in achieving climate change objectives.

What is active stewardship?

Active stewardship refers to the actions that investors like RBC GAM can take to better understand and influence the activities of companies in which they invest (called issuers). We often express our views through:

Engagement with issuers, either directly or together with other like-minded investors. Engagement allows us to learn about how issuers are approaching opportunities and key risks in their business due to climate change.
Proxy voting on management and shareholder proposals. Proposals from shareholders often relate to climate change.

What is divestment?

Divestment refers to selling or avoiding investments in companies, sectors, or countries based on specific activities. It may be a direct alternative to active stewardship for investors seeking to effect change or to avoid sectors or areas where they perceive outsized risks. Fossil fuel divestment can focus on the exclusion of all fossil fuels, specific types of fossil fuel, or specific extraction methods.

Investors who choose to divest from fossil fuels are often motivated by a desire to address climate change and/or to minimize financial risks. Global institutional investors have committed approximately US$11.48 trillion to divesting from fossil fuels as of 2019.¹

Is divestment effective?

In this article we lay out common motivations driving investors’ fossil fuel divestment strategies, and explore whether divestment can succeed in achieving those objectives. Here’s a quick look at the four goals investors are typically trying to achieve:

Goal #1: To minimize financial risks from asset stranding

Stranded assets are investments that a company has made but which will stop earning an economic return at some time before the end of their economic life.² Examples include the investments needed to find, extract and produce oil, coal or gas. These assets are at risk as governments pursue policies to reduce global warming under the Paris Agreement.³

While a fossil fuel divestment strategy may avoid exposure to asset stranding risk from the fossil fuel sector, it does not take into consideration the exposure to this risk across other sectors, nor does it differentiate between those companies that are proactively and effectively mitigating the risk versus those that are not.

Goal #2: To reduce greenhouse gas (GHG) emissions

Addressing climate change will require a significant reduction in GHG emissions. Most fossil fuel divestment focuses on excluding energy companies involved in extracting or producing fossil fuels, but fails to address the fact that most emissions are generated by the use of their products (e.g., for transportation, buildings, electricity).⁴Divesting also removes the investor’s influence with the company, and may shift ownership of the emissions to a less discriminating investor. Reducing GHG emissions in the real economy requires structural changes that cannot be achieved through divestment.

Goal #3: To accelerate the transition to a low-carbon economy

Transitioning to a low-carbon economy will require GHG emission reductions across sectors, as well as structural changes to our fossil-fuel based energy and transportation systems and our energy-intensive manufacturing and building sectors. A divestment strategy that targets an entire industry or sub-industry eliminates the ability of investors to direct their investment dollars towards the climate leaders within that industry, and away from its laggards. As such, this can remove the incentive for these companies to strive towards climate leadership, and miss out on opportunities to maximize long-term risk-adjusted returns.

Goal #4: To send a signal to companies and regulators.

For some investors, the objective of a fossil fuel divestment strategy is to drive change by sending a signal to companies and policy makers. Divestment campaigns have successfully played a part in changing the discourse around the legitimacy, reputation, and viability of the fossil fuel industry. However, this strategy does not work with state-owned oil companies that control at least US$3 trillion in assets and produce most of the world’s oil and gas.⁶

Moving forward

While RBC GAM offers divestment solutions, we believe that the best approach to support the transition to a low-carbon economy is through active stewardship.

We support this belief by continuing to invest in companies that are taking actions to reduce their greenhouse gas emissions and that position themselves in line with the goals of the Paris Agreement. We also use our influence as active investors to make sure that companies have in place robust governance oversight of climate change and report transparently on the actions they are taking to integrate climate change into their strategic, financial and risk management processes. We make investment decisions on a case-by-case basis and use stewardship activities to motivate companies to implement strategies and take actions that enable climate mitigation and adaptation. We recognize the importance of our role as an active investor and we will continue to be an active part of the climate change conversation and the transition to a low-carbon economy.

Read the full article or learn more about our initiatives as an active steward.

1. $11 trillion and Counting, Go Fossil Fuel Free, 350.org, Divest Invest, September 2019 2. IEA. 2013. “Redrawing the Energy Climate Map.” World Energy Outlook Special Report, p.134. 3. Mercure, J., Pollitt, H., Viñuales, J.E. et al. Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change 8, 588–593 (2018). 4. MSCI ESG Research, July 2020 5. Global emissions, Centre for Climate and Energy Solutions, accessed November 26, 2020. 6. Data-driven Insights into National Oil Companies, April 2019, Natural Resource Governance Institute

Additional information about RBC GAM may be found at http://www.rbcgam.com.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Publication date: February 4, 2021

An investor’s guide to net-zero emissions

officebureau — Mon, 27 Sep 2021 16:00:04 +0000

istock / Fabian Gysel||

PAID CONTENT

While the year 2020 will be remembered for many things, it will also be remembered as a year of action on climate change. In particular, the past year saw a rise in government and corporate commitments to net-zero emissions targets. This paper will explore why these commitments are being made now and how RBC Global Asset Management (RBC GAM) considers climate targets and other factors as part of the investment process.

What are net-zero emissions?

Achieving net-zero emissions refers to achieving balance between the greenhouse gas (GHG) emissions produced and those taken out of the atmosphere. The concept of net-zero emissions may also be referred to as climate or carbon neutrality.

Net-zero emissions does not mean no emissions. Under a net-zero policy, emissions can still be produced, as long as they are offset by processes or actions that reduce the emissions already in the atmosphere. Tree planting and carbon removal are two examples of such offsets.

Why do we need to reach net-zero emissions?

Human activities (such as the burning of fossil fuels) and land-use changes (such as deforestation) are responsible for the release of GHGs into the atmosphere. As GHG emissions accumulate, they get trapped, causing global average temperatures to increase. The result is climate change.

Global average temperatures have already increased by ~1^oC since pre-industrial times and climate impacts are already being felt around the world – extreme weather events, droughts, floods and more. In 2018, the Intergovernmental Panel on Climate Change (IPCC) made clear that any increase in warming beyond 1.5^oC by the end of the century would have significant implications. According to the IPCC, to achieve this goal, the world needs to halve carbon dioxide emissions by approximately 2030 and reach net-zero carbon emissions by 2050.

While the IPCC report was a catalyst in establishing the science and timeline behind net-zero emissions targets, it was the Paris Agreement’s ambition, set in 2015, to limit global warming to “well-below 2^oC” that set the stage. With 197 signatories, the Paris Agreement acknowledged the need to achieve a balance between emissions produced and removed, and by setting a temperature target it launched deeper analysis of the emissions level required to limit global warming.

How do we get there?

In short, to minimize the impact of climate change, net emissions need to fall to zero by the middle of the century. This will require significant transformation across industries in order to reduce the amount of new carbon emissions. This will also require the removal of carbon that is already in the atmosphere, through the deployment of carbon removal technologies and activities that store carbon, such as tree planting or land-use management. It will also entail changes in policy, technology, and human behavior.

According to the IPCC’s report, limiting global warming to 1.5°C will require “rapid and far-reaching” transitions in land, energy, industry, buildings, transport, and cities.

In order to achieve net-zero emissions, de-carbonization will need to take place across all of these sectors.

In many sectors, technologies and strategies already exist that can bring emissions down – such as renewable power, energy storage, carbon capture and storage, and soil management for carbon sequestration. To meet global net-zero emissions targets, however, these will need to be rolled out on a broader scale, and new technologies and strategies will still be required. Some of the challenges that many sectors and technologies face is the intransigence of legacy systems (e.g., gasoline cars and related infrastructure, carbon-based heating and cooling systems), the misalignment of price signals in some markets (e.g., price on carbon), and the lack of cost competitiveness for incumbent technologies. To achieve net-zero emissions, most economies and sectors will also need to implement carbon removal technologies, nature-based solutions (e.g. restoring forests, boosting soil uptake) and carbon offsets. The need for carbon removal is due to the persistence of GHG emissions in the atmosphere for tens of hundreds of years after they are produced. It is also due to the reality that emissions will continue to be produced from both natural and human-based systems.

Who is making commitments to net-zero emissions?

Several factors have been driving the recent attention and focus on net-zero emissions by governments and companies. They include the rising financial and human costs of extreme weather events, legislative action on climate change in key jurisdictions (European Union, China), and changing corporate perspectives on the role of businesses to address climate change.

The past year has been marked by government action on climate change, with more than half of the global economy covered by net-zero commitments. Those making such pledges include the European Union, the U.K., Canada, and China. The European Union’s Climate Law was proposed in March 2020 and proposes a legally binding target of net-zero GHG emissions by 2050. Canada presented proposed legislation in November 2020, to establish interim targets and achieve net-zero emissions by 2050. China’s goal of reaching net-zero emissions by 2060 is notable given the country’s significant contribution to emissions (28% of global emission)² and the effort that this will require (~90% reduction in emissions).³ It is also noteworthy due to the country’s current demand, investment, and production of low-carbon technologies. China leads the world in the production of solar panels, wind turbines, batteries and electric vehicles.⁴

As of early 2021, fourteen countries around the world have either passed or proposed legislation to establish net-zero emissions (most by 2050), while another fourteen have made a similar commitment in policy.⁵ According to the same report, an additional 100 countries are discussing net-zero targets, with plans to announce these in the coming year, in the lead-up to the annual United Nations Conference on Climate Change in November 2021.

The 197 signatories of 2015’s Paris Agreement committed to submitting updated and more ambitious climate targets, called Nationally Determined Contributions (NDCs), every five-years. The first step-up in commitments came due in 2020. Hours after President Biden’s inauguration, the U.S. confirmed it would re-enter the Paris Agreement, effective on February 19^th 2021, requiring the U.S. to set its own targets.

This past year also saw the number and scope of corporate net-zero emissions targets continue to grow. This includes commitments from BP,⁶ Ford Motor Company,⁷ Walmart,⁸ American Airlines,⁹ Apple,¹⁰ Microsoft,¹¹ Cemex,¹² and more. Corporate net-zero emissions targets typically vary across three key dimensions: the scope of climate impacts and activities that are captured by the target; the timeframe for achieving the target; and the strategy or approach for reaching net-zero (see Diagram).¹³ The ease and manner in which a given target can be met will depend in large part on how the company has defined their target in relation to these key dimensions. For example, since the bulk of emissions from energy companies are due to customer use of their products (i.e., Scope 3 emissions), meeting net-zero emissions targets that are inclusive of these emissions is challenging and will likely require greater emphasis on carbon removal technologies. For automobile manufacturers, while their emissions also come from the use of their products, most of the focus is on changing the type of product (e.g. electric vehicles) available.

Key dimensions in corporate net-zero targets

How does RBC GAM consider climate change in our investment process?

RBC GAM recognizes and supports the need to achieve a just transition to a low-carbon economy that boosts economic prosperity while safeguarding equality for all. We believe that considering the financial impacts of climate change in our investment approach is a material factor in enhancing long-term, risk-adjusted returns. It is for this reason that we consider within our investment process whether companies have effective governance structures, comprehensive climate targets, strategic integration of climate risks and opportunities, and transparent disclosure on how climate risks and opportunities are integrated into decision-making. We make investment decisions on a case-by-case basis and use stewardship activities to motivate companies to implement strategies and take actions that enable climate mitigation and adaptation.

We have long had a focus on responsible investment, which includes climate change. In 2020 we took the additional step of formalizing our strategic approach. Our approach to climate change is built upon the three pillars established in our approach to responsible investment and sets the foundation for our commitments and actions to address climate-related risks and opportunities.

Fully integrated ESG: We integrate climate-related risks and opportunities in our investment process by using advanced climate data and analytics and climate scenario analysis as inputs to the decision-making process. This includes our assessment of an issuer’s climate change strategy, governance oversight, targets and performance.
Active stewardship: Using proxy voting, direct engagement, and collaboration with like-minded investors, we encourage issuers and regulators to consider climate mitigation and adaptation in their activities. We seek to motivate corporate issuers to take action through effective governance oversight of climate change, establishment of targets and strategies to reduce GHG emissions, and disclosures on related activities and outcomes.
Client-driven solutions and reporting: We also work with clients to develop solutions that meet their needs, and provide transparent and effective reporting on how we consider climate-related risks and opportunities as part of our investment process.

1. Global emissions, Centre for Climate and Energy Solutions, accessed November 26, 2020 2. China Says It Will Stop Releasing CO2 within 40 Years, Scientific American, September 2020 3. What China’s plan for net-zero emissions by 2060 means for the climate, The Guardian, October 5, 2020 4. What China’s plan for net-zero emissions by 2060 means for the climate, The Guardian, October 5, 2020 5. Energy and Climate Intelligence Unit, Net-zero emissions tracker, accessed February 4th, 2021 6. BP sets ambition for net zero by 2050, fundamentally changing organisation to deliver, February 12, 2020 7. Ford expands climate change goals, sets target to become carbon neutral by 2050, June 24, 2020 8. Walmart sets goal to become a regenerative company, September 21, 2020 9. American Airlines Publishes 2019-2020 ESG Report, October 15, 2020 10. Apple commits to be 100 percent carbon neutral for its supply chain and products by 2030, July 21, 2020 11. Microsoft will be carbon negative by 2030, January 16, 2020 12. Climate Action, February 19, 2020 13. Foundations for science-based net-zero target setting in the corporate sector, Science-based Targets Initiative, September 2020

Additional information about RBC GAM may be found at http://www.rbcgam.com.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Publication date: February 26, 2021

Q&A: Pandemic impact on ESG

officebureau — Tue, 21 Sep 2021 16:00:50 +0000

istock / AvigatorPhotographer

PAID CONTENT

The pandemic has brought a number of ESG themes to the forefront. In regards to the environment, we’ve seen an increase in net-zero emissions pledges in recent months. Social concerns include firms making the health and safety of their workforce a priority. And as for governance, what effects do virtual annual meetings have on shareholder rights? In this Q&A with various RBC Global Asset Management investment teams, they discuss these topics and more.

Our teams are in a host of cities across North America, Europe, and Asia, and they bring a diverse set of perspectives to bear on the challenges – and opportunities – facing investors today.

What sort of contingent assets have you seen come to light throughout the COVID-19 pandemic?

RBC Global Equity team (London)

The RBC Global Equity team looks for businesses that create contingent assets – or intangible assets that we believe will generate value for shareholders over the long term (e.g., corporate culture, sustainable business practices, etc.). In the first half of the year, we saw many examples of companies sacrificing short-term profits to respond to the pandemic and this being rewarded by an increase in the firms’ values. Companies invested in the health and safety of their employees and the communities they operate in switched production to make Personal Protective Equipment (PPE) for healthcare workers, and extended paid vacation time for employees to cope with the stress and demands of the virus’ impact. We believe commitments to social factors like a strong workplace culture as well as robust employee management and development can lead to increased employee engagement, productivity, innovation, and retention–all of which can create long-term value for companies and their investors.

During the pandemic, how important has messaging from the top been for companies with smaller workforces?

RBC U.S. Equity team (Boston)

The RBC U.S. Equity team in Boston is primarily investing in micro- and small- to mid-cap companies. Throughout the pandemic, we’ve engaged with investee companies on their employee management practices. We’ve seen instances of management teams leading by example, taking salary cuts and forfeiting bonuses, as well as examples of clear, transparent communication to employees on the importance of, and their commitment to, health and safety practices. In our view, this focus on a company’s people is material to all businesses, regardless of size, but can be especially important for smaller companies navigating the challenges of the pandemic.

Has the COVID-19 pandemic shown us anything about the opportunities in “social infrastructure” in emerging markets?

RBC Emerging Markets Equity team (London)

The RBC Emerging Markets Equity team defines social infrastructure as essential public assets and services that support peoples’ daily lives and have a significant impact on their standard of living. While we have seen unprecedented demand for infrastructure assets in emerging markets (EM), consistent underinvestment has led to substantial shortfalls in the quality and quantity of infrastructure.

Social infrastructure assets support the sustainable growth and development of a country and play a vital role in helping the rapid rise of the EM middle class. The pandemic has heightened awareness of social and environmental factors, and we feel that these are becoming increasing sources of both opportunity and risk. We have therefore decided to focus our infrastructure theme on green infrastructure.

It is likely that efforts to grow certain areas of infrastructure, such as smart cities and social infrastructure, will be better supported in the future. The pandemic has emphasized the importance of social infrastructure in areas such as healthcare, sanitation, housing, and education. For example, if we look at healthcare specifically, underinvestment has contributed to the healthcare infrastructure of EM lagging that of developed markets both in terms of quality and quantity. In our view, COVID-19 has accelerated the demand for healthcare services in EM, and while we expect significant government spending over the next decade, we believe there is an opportunity for the private sector as well.

How have the impacts of the pandemic on technology fit into your investment process?

RBC European Equity team (London)

The RBC European Equity team has thoroughly researched the long-term impacts of technological disruption. The pandemic has illustrated technological disruptions across sectors, including the capabilities of remote work and changes to the ways we access and consume goods. We believe this exemplifies our view that technology crosses every branch of commerce and all sectors, which is why whenever we look at a new idea to invest in, we ask the question, “Will the sustainability of the business model be affected by technological disruption?” We engage with management teams to get their views and strategic thinking related to potential disruptions and long-term trends, but we also pay close attention to a company’s focus on innovation, as it can be a source of both risk mitigation and opportunity.

How transparent have boards and management been regarding delays or reduced prioritization of ESG initiatives as companies dealt with the risks posed by the pandemic?

RBC North American Equity team (Toronto)

The RBC North American Equity team has several ongoing engagements with investee companies on ESG initiatives, such as those designed to reduce greenhouse gas emissions. Our engagements with companies on any postponed or stalled ESG initiatives were largely candid and transparent. At the outset of the pandemic, we had regular conversations with boards and management of investee companies on their financial status and forward-looking strategies as they grappled with the economic impacts of the pandemic. As long-term investors, we recognized the need for companies to deal with some of the most acute and severe risks, but also saw companies maintaining their long-term focus, including on ESG initiatives. If we look at environmental projects, for instance, we were encouraged to see so many companies emphasizing their continued commitment to projects that would reduce emissions or emissions intensity.

We’ve seen significant progress on ESG factors in several Asian markets in the last few years. Has COVID-19 stalled that progress or are we seeing continued momentum for increased disclosure, improved governance, and investments in climate-related solutions?

RBC Asian Equity team (Hong Kong)

In the second half of 2020, we saw some notable ESG commitments out of Asia. In October, both South Korea and Japan set targets of carbon neutrality by 2050. This came after President Xi Jinping of China announced a net-zero target for 2060. If met, this latter commitment by China alone could have substantial impacts on global emissions overall. These commitments come amidst recent improvements in overall corporate governance standards and practices in the region. For instance, in Japan, since launching the Japan Stewardship Code in 2014, we’ve seen increased levels of board independence, increased use of shareholder proposals, and some improvements to board gender diversity levels. Markets such as South Korea, India, and Taiwan have all launched their own respective stewardship codes as well, so we expect to see continued momentum on these fronts, complementing our ESG integration process and engagements with investee companies on enhancing their ESG disclosures.

Have you noticed any wider trends in responsible investment during the pandemic? Has there been an upsurge of interest in responsible investing?

BlueBay (London)

Yes. The market statistics on scale and pace of asset flows into ESG-themed funds, both passive and active, for 2020 show these have been at a record high. Whilst COVID-19 could be a tipping point for ESG, it is important to point out that the pandemic is only accelerating a trend in ESG investing which was already in place. But the strong performance of ESG-themed funds during this challenging year has certainly attracted some to this market who may not have done so. In our view, the drivers for this have been a mix of increasing societal concerns about environmental and social problems such as climate change and inequalities, but also a result of increasing ESG regulation.

Companies were forced to modify their annual meetings during the 2020 proxy season to a virtual-only format, but a virtual meeting carries some risks for shareholder rights. What do you expect from companies when it comes to shareholder meetings going forward?

PH&N Canadian Equity team (Vancouver)

We don’t believe that a virtual-only meeting experience is directly comparable to an in-person experience for all shareholders. For example, virtual-only meetings may facilitate the vetting or filtering of tough questions for boards and management. That said, virtual meetings also allow more shareholders to attend shareholder meetings, so there are some benefits. In our view, in the absence of health and safety concerns, a hybrid meeting format that combines a traditional in-person meeting with virtual participation is appropriate. Where virtual participation is used, we do expect robust disclosure from companies on meeting procedures, how shareholder rights are being protected, and how shareholders can ask questions during the meeting.

The pandemic has had many direct impacts on businesses, but many downstream and indirect impacts as well. What are some ESG factors considered in your investment process where we may see the impacts of COVID-19 playing out for years to come?

RBC U.S. Growth Equity team (Chicago)

One unknown element going forward relates to employee training and advancement opportunities in a work from home environment. Many employees – and more junior employees, especially – develop by observing and working closely with leaders or mentors. At this time, virtual meetings and interactions may not provide those employees with this same experience, so companies will need to thoughtfully consider their approach and how it could impact employee retention, satisfaction, and development.

Funding for green bonds was increasing prior to the pandemic. But we’ve also seen bonds used to fund social initiatives. Did we see any examples of social bonds linked to COVID-19 and how do they generally work?

RBC Global Fixed Income team (Toronto)

One specific example in Europe is a social bond, issued by the European Union (EU) under the €100 billion SURE program, which provides “Support to mitigate Unemployment Risks in an Emergency.” We have invested in this new instrument. The program provides common funding to EU member states to fight economic and social impacts of the pandemic by preserving employment and financing health-related measures at workplaces to ensure a safe return to normal economic activity.

To finance the program, the European Commission issued social bonds adhering to a Social Bond Framework which describes the use of proceeds to fulfill social objectives. The framework also includes reporting requirements for member states and defines how the funded initiatives contribute towards the United Nations Sustainable Development Goals. In 2020, the European Commission issued nearly €40 billion in social bonds through SURE.

What ESG trends have we seen in Canadian corporate credit, specifically? Has there been a change in these trends throughout the pandemic?

PH&N Canadian Fixed Income team (Vancouver)

Over the course of 2020, the Canadian investment grade corporate bond market saw just under $5-billion in green bond issuance, which is approximately 70% more than in 2019. It also became clear that corporate issuers are more aware of the need to improve ESG reporting and in many cases made public commitments on GHG emission reduction targets. Notably, this theme was present across various sectors. For example, in REITs we saw a number of new green bond deals with issuers providing detailed frameworks and third party verified use of proceeds. And in the energy sector, some of Canada’s largest entities released their climate change plans that focused on transition and decarbonization. This included some firm goals of becoming net carbon neutral by 2050 with milestone targets along the way and commitments to using their size and scale to encourage advancing solutions that would help Canada as a whole reach net zero by 2050. We are pleased to see the increasing degree of ESG awareness and expect this theme to continue as Canada looks to embark on a path to recovery.

Read our 2020 CGRI Annual Report to learn about our latest ESG activities.

Additional information about RBC GAM may be found at http://www.rbcgam.com.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Publication date: April 7, 2021

The future of emerging markets: Green Infrastructure

officebureau — Tue, 21 Sep 2021 16:00:02 +0000

istock / imamember

PAID CONTENT

The World Economic Forum has identified environmental issues as a key risk and we believe that this risk is even more pronounced in emerging markets (EM) and that climate change will have strong economic and political ramifications for EM governments. As environmental risks become increasing sources of both opportunity and risk for investors, we have decided to focus our Infrastructure theme on ‘Green Infrastructure’ which we believe is a multi-decade growth story.

This report summarizes the key factors which we believe will drive the Green Infrastructure theme and analyzes the best ways to benefit from the theme. Rising temperatures and ‘extreme weather’ incidents associated with global warming, the impact of climate change on people’s health, and the increased government focus on environmental issues are all areas which are driving the acceleration of Green Infrastructure. From an investment perspective, the renewable energy (solar and wind power specifically), electric vehicles (from component and battery manufacturers to the actual car makers themselves) and transmission metals industries will provide the best ways to ‘play’ the theme and this report gives more detail on those opportunities. In addition, sectors such as energy storage, food and agriculture and hydrogen are also of interest.

Our investment philosophy and process has always included a detailed assessment of climate-related risks and opportunities as part of our overall ESG assessment. EM are being disproportionately affected by climate change, however, in terms of both physical risks and financial implications, and the substantial deficits in social infrastructure and investment have been exacerbated by the COVID-19 pandemic. As such, we believe Green Infrastructure will provide an exciting opportunity for us.

Read the full whitepaper.

Additional information about RBC GAM may be found at http://www.rbcgam.com.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Publication date: July 5, 2021