Navigating the Gray Area:
The State of Responsible Investing
President & Chief Executive Officer
Royal Bank of Canada
RBC Dexia Investor Services Conference
May 24, 2007
A few weeks ago, I was sent an article about the kind of
returns an investor can expect with a portfolio of sin-stockslike
tobacco, gambling, alcohol and weapons. It was called "Smoke,
Drink and be Merry".
The article described a "sweet-looking elderly woman"
at the annual meeting of Rothmans, a Canadian tobacco company.
At one point during the proceedings, this lady turned to the
man sitting beside her and whispered: "Thank goodness
for all those stupid smokers."
You can almost hear the satisfaction in her voice.
But as happy as she was with her returns, she also made a
confession to the gentleman beside her. She never, ever discusses
this particular investment with her friends in the bridge
club. They might not approve.
Investing in tobacco is her guilty little secret.
Welcome to the new world of investing, where guilt and pride
are becoming much a part of the mix as ROI.
I have my own confession to make this morning: If you'd asked
me a few years ago about "socially responsible"
or "responsible" investing, as it's becoming known,
I'd probably have predicted that the market wouldn't become
mainstream in my lifetime. In fact, I would have struggled
with the conflict between fiduciary responsibility and social
But times are changing, and quickly. Just as CEOs must be
much more focused on its various constituents--not just shareholders,
so too must investors be concerned about things other than
simply return as well as understanding the relationship between
performance and social policies.
That sweet-looking lady might have been content to hold a
so-called "sin stock," but her reluctance to talk
about it shows that she understands what responsible investing
means just as well as anyone who refuses to invest in tobacco.
Now, more than ever, people are willing to put their money
where their values are. We see it most clearly at the consumer
level, with a growing demand for hybrid vehicles and green
products, or in efforts like Bono's Red Label campaign. People
want to do better.
I chair the pension committee at Sick Kids Hospital. How
do we balance our responsibilities to our pensioners with
the issue of our investment managers holding investments in
companies that may produce products viewed as detrimental
This is a new issue for us and we see this trend, increasingly,
in the investment world. More and more individuals are demonstrating
that they are ready to reward companies that behave well and
operate sustainably. And they're willing to wash their hands
of those that don't.
Today's conference asks the question - are responsible investing
and optimal returns mutually exclusive, or vitally linked?
More simply put, can investors do well by doing good?
The question isn't new. It's been around since at least the
1960s, when many churches and universities began screening
their investments to protest corporate involvement in the
Vietnam War. It gained a new face and fresh momentum in the
late 1980s with the rise of the first ethical funds and an
increased focus on sustainable development.
There is certainly ample research suggesting that corporations
with good social records, on the whole, outperform corporations
with bad ones. But you can also find data showing that companies
with socially 'irresponsible' products can deliver a good
return as well.
However, no matter which side of the fence you come down
on, the debate may be academic at this point.
Make no mistake: responsible investing is a growth business.
It even comes with its own celebrities, like Al Gore and Sir
Nicholas Stern. Their voices and others are calling on business
to act in a more sustainable manner, and urging investors
to support those that do and penalize those that don't. This
represents a potentially seismic shift in how people decide
to invest their money.
The numbers alone suggest that responsible investing is here
- The 2006 Canadian Socially Responsible Investment Review
calculated that assets invested in Canada using responsible
investment guidelines increased from $65-billion in 2004
to more than $500-billion as of June 2006.
- In the United States, it's estimated that one of every
10 dollars under professional management is considered to
be responsibly invested.
- And in Europe, responsibly invested assets under management
hit 1 trillion Euros at the end of 2005.
One of the best illustrations of the changing investment
landscape is the rapid growth of the Carbon Disclosure Project,
or CDP for short.
In 2002, 35 institutional investors asked some of the world's
largest companies to disclose the climate-related risks and
opportunities they considered material.
RBC happened to be one of the companies that received the
survey. We thought it was an interesting exercise, and ended
up being one of about 300 companies who reported, voluntarily,
to the CDP. We've continued to report every year since then.
As concerns about climate change have taken deeper root in
the public mind, more institutional investors have signed
the request at the front end: from just those 35 in 2002,
to 284 this year - representing some $41-trillion in assets
under management. By signing, these investors declare that
climate change issues are a factor in their investment decisions.
I'm pleased to tell you that this year, RBC Asset Management
joined the ranks of asset managers to sign the request for
I don't want our friends from Dexia to think I'm ignoring
them, so I should also mention that Dexia Asset Management
has been a signatory to CDP since 2004.
In many ways, you can take the Carbon Disclosure Project
- and its exponential growth - as proxy for the responsible
investing community as a whole. The same goes for the army
of SRI analysts and research specialists that has sprung up
to help investors evaluate companies' environmental, social
and governance performance...that trinity now known as "ESG".
If you're looking for more information on the growth of responsible
investing, I encourage you to read RBC Dexia's latest Special
My point is simply this. Whether you believe in it or not,
responsible investing is quickly becoming a force to be reckoned
But when you drill down on the details, the discussion gets
a little more interesting and a fair bit murkier. I think
that the terminology itself causes some of the confusion.
If you ask 10 different people what responsible investing
is, you'll likely get 10 different answers.
Terms like "socially responsible investing", or
"ethical investing" are falling out of favour because
they have moral overtones, leftover from the days when investors
chose stocks based on religious or ethical criteria, for example.
These terms cause grief for mainstream asset managers, who
rightly question if it's their job to be a moral compass and
how one can reasonably access different companies in this
Responsible investors would say that they're not interested
in making feel-good decisions based solely on personal ethics.
They're not looking for a moral compass and they are interested
in getting a good return.
In short, they believe that companies have 'hidden' assets
and liabilities, related to environmental, social and governance
risks and opportunities, which matter immensely, but are not
traditionally disclosed on a balance sheet. They point to
companies like Shell, Nike and Enron as examples of the impact
on a company's share price when these factors are not managed
That's why you'll now hear the trend described as "responsible
investing" or "sustainability investing".
The underlying investment tenet here is that there is a direct
link between a company's social and environmental performance
and its financial performance-the triple bottom line. Responsible
investing is about an intentional examination of all three.
And on this basis, the issue of responsible investing has
legs and will be increasingly critical to corporations and
the investors in those companies.
No matter which term you use, it's fair to say that the responsible
investing is changing the way we view companies and how they
are addressing the challenges of sustainability. And that
is certainly the theme behind this morning's conference.
The strongest driver towards responsible investing has been
within the institutional investment community, among pension
funds in particular.
In fact, the increase in assets invested in 'responsible'
companies is almost entirely due to large pension plans that
have adopted specific policies on responsible investment.
The same is true in the States.
The launch of the UN Principles for Responsible Investment
last year was a significant milestone. Now one year old, the
Principles boast 183 signatories globally, representing more
than $8-trillion USD in assets under management.
As a financial institution, RBC is an interesting case study
because we're not just in the asset management business, we
are also a potential stock pick for responsible investors.
Some of our top institutional investors, including the CPP
Investment Board, BC Investment Management and OMERS, actively
screen their investments for environmental, social and governance
factors. I am confident they will continue to see RBC as a
good investment not just for our sustainable financial returns
but for our approach to sustainability as well.
We're fortunate to have Doug Pearce here today, from the
BC Investment Management Corporation. As soon as I'm done,
he'll be speaking about how responsible investing is challenging
the traditional notions of portfolio management, so I won't
go into any more detail.
I will just add that we're definitely seeing a new breed
of investor who wants to influence the corporate agenda as
much as they want to see a financial return - and are happy
to flex their muscles to affect change.
You can gauge the interest in responsible investing simply
from the increase in shareholder proposals being filed about
ESG issues and the exponential growth in the number of questions
being asked by institutional investors, researchers and clients
- and as a CEO, I have to make trade offs that may not be
in the best short term profit interest of the Bank but are
viewed in our best long term interest.
The next complication is figuring out what makes one company
responsible and another one irresponsible. Who determines
which companies are good and which are better investments?
What constitutes a truly responsible company?
In the end, you may turn to socially responsible investment
analysts and research companies for advice.
In early April, Joe Nocera, a business columnist for The New
York Times, wrote an interesting article in which he argued
that SRI researchers oversimplify the world so that investors
will feel that that they're safely invested in 'good' companies.
The problem as Nocera sees it, is that no company is either
all good or all bad.
He has a point.
In the last two years, RBC was named "Canada's Most
Respected Corporation for Social Responsibility", but
44th on a list of Canada's "Best 50 Corporate Citizens."
The Dow Jones Sustainability Index ranks us in the middle
of the pack of global financial institutions for sustainability,
but recently, we were named 'Greenest Company in the World"
in Newsweek magazine.
Now, we know why we landed where we did on each, because
we pay close attention to the complex methodologies and differences
among all of these rankings. And, overall, we tend to fare
well, because we pay close attention to the risks and opportunities
presented by ESG factors and act on them where we can and
we report on them.
But imagine if you were just venturing into the world of
responsible investing. How would you make sense of it all?
You'd have to be crystal clear about your own investment
philosophy and make sure that your financial advisor understands
it too. You might draw upon detailed research or analysis
if you're interested in very specific issues such as human
rights or governance.
Or, you might choose your stocks from an SRI index created
with large-scale investors in mind, or one that doesn't attempt
to divide the world into black and white.
In Canada, the Jantzi Social Index falls into this category.
Rather than categorizing companies as 'good' or 'bad', the
JSI is based on "best-in-sector" approach. It acknowledges
companies that are striving to improve their ESG practices
compared with their peers.
So, rather than screening out entire sectors like oil and
gas because of their environmental impact, the JSI includes
the companies that are doing best at sustainability in all
This makes sense in Canada, where so much of our economy
is based on resource extraction - typically an area of interest
to environmentalists and human rights activists.
Excluding those sectors would leave slim pickings, and would
disregard some of the extraordinary sustainability efforts
underway in the resource sectors.
I would argue strongly that some of Canada's largest oil
and gas and mining companies are world leaders in environmental
stewardship yet they suffer from the perspective of the industry
in which they operate - which is why the JSI approach makes
Using this approach, the JSI has consistently outperformed
the S&P/TSX Composite and the S&P/TSX 60 over the
last seven years highlighting the coalition between social
responsibility and return.
My last point this morning is about the role and responsibility
of asset managers. Do they have any fiduciary responsibility
when it comes to responsible investing?
This is a question that the law firm Freshfields set out
to answer in 2005 in a landmark report commissioned by the
United Nations Environment Program.
It's worth noting here that Freshfields confirmed that it
is not only permissible for fiduciaries to consider ESG factors,
but in many jurisdictions it is a breach not to perform due
diligence on these factors when they have the potential for
material, financial impact.
While the Freshfields report is a coup for the responsible
investing community, it remains to be seen how mainstream
asset managers will receive it.
At the very least, fiduciaries should recognize that there
is a range of expert opinions on their obligations. And they
should be prepared to develop a formal point of view on responsible
investing, because they'll be asked about it sooner rather
That's the lesson the Bill and Melinda Gates Foundation learned.
Earlier this year, the Los Angeles Times broke a story accusing
the Gates Foundation of investing in companies that, directly
or indirectly, cause a whole host of social and environmental
problems. And these are the same problems that the Foundation
is committed to fighting through its grants.
A few years ago, Al Gore and David Blood from Goldman Sachs
started an investment-management research firm that integrates
sustainability factors with fundamental equity analysis. They
believe it's just a matter of time until the marriage of financial
and non-financial factors goes mainstream.
I'm reluctant to disagree with Mr. Gore (especially when
I see what happened when our environment minister tried it
a few weeks ago.) He might be right, yet it's too early to
come to any conclusions about the degree to which responsible
investing will move into the mainstream. Time will tell.
But it is clear that we have entered an era in which more
people are devoting more thought to their investment choices,
and more scrutiny to the behaviour of companies. There is
no going back, and corporate officers ignore this reality
at their peril.
It is true that the precise contours of responsibility may
be impossible to define for society at large - but more people
will be defining these contours for themselves. They'll be
deciding for themselves what constitutes a responsible company.
And they will be investing their money accordingly.
Millions of investors making millions of decisions - some
small, some large - but add them up, and we are going to find
the traditional investment terrain changed forever.
As a business executive, investor, politician or NGO nothing
is black and white and we are expected and will be judged
on our ability to navigate in the gray area. Responsible investing
adds to that gray area.