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 responsibility.
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 to health.
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 to stay.
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 information.
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 Report.
My point is simply this. Whether you believe in it or not, responsible investing is quickly becoming a force to be reckoned with.
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 regard.
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 well.
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 sectors.
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 good sense.
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 than later.
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.