Last week I had the opportunity to attend (virtually) a fascinating set of sessions organized by RBC Capital Markets (RBC CM) that dealt head-on with the Environment, Social and Governance (ESG) issues facing companies today.
The timing of the conference could not have been better. On the heels of the one-year anniversary of the beginning of the Coronavirus pandemic, the conference was held a mere week following the re-entry of the United States of America into the Paris Agreement. With the majority of S&P 500 companies reporting their fourth quarter 2020 earnings, it also presented an opportunity to better understand what key topics companies were focused on in their industry. The findings as compiled by Sara Mahaffy, RBC CM U.S. Equity Strategist further reinforced the importance of including ESG factors into investment decisions and portfolio construction. With ESG commentary featured in every S&P 500 sector during the fourth quarter earnings call surveyed, no longer can ESG be considered a ‘niche’ but rather a topic that has entered mainstream investing.
The highlights from the conference included sessions on ‘Rethinking Sustainability & Water’. Access to clean water and sanitation is one of the United Nations’ Sustainable Development Goals – and it is a theme that features in my clients’ portfolios. During this session, it became clear that water quality, water scarcity/sustainability and water security were core principles all the companies featured championed. Each of the companies acknowledged that these core tenets were firmly engrained in their corporate culture, and that leveraging technology in ‘smart’ water would assist in making better decisions with the resource and keep the delivery of clean, reliable water affordable. They also echoed a belief that I hold close: that we are all still in the early innings of the ESG journey.
A common thread throughout the corporate presentations held during the virtual conference was the importance of transparency in communicating ESG strategies. Some companies are already integrating ESG reporting with their financial reporting, while others are highlighting the need in setting interim goals and benchmarking against past performance in order to show progress and establish objectives against which stakeholders can hold them accountable. While an established nomenclature remains elusive, leading companies are disclosing an ever increasing amount of information, which makes the work of this responsible investment advisor easier in researching potential portfolio holdings. Over the course of the coming years, I would expect market regulators to require ESG disclosures much in the same vein as financials, thereby making it easier to compare and contrast companies and align values with value.
The opportunity set of ESG was a consistent theme throughout the three-day event. Most companies discussed decarbonization in the context of technological innovation – in other words, leveraging technology to solve the climate challenges we face will be essential. Areas such as hydrogen, carbon capture and storage, biofuels, and electric vehicles received a lot of attention. In renewables, the reduction in costs, the support of the new Biden administration and generational pressures are favorable factors. Of course, with the flow of capital into renewables comes increased competition and margin compression. However, first mover advantages and specialization in offshore wind or smart gird capabilities remain differentiators. One CEO captured the ESG opportunity succinctly by pointing out that the momentum behind decarbonization will really accelerate when more companies view ESG as an opportunity, rather than just a problem. I could not agree more.
Rounding out the major themes of the conference was diversity and inclusion (D&I). A topic close to my heart, D&I is just good business strategy. In a “flat world” where borders are increasingly meaningless and the workforce has proven itself mobile and adaptable, why wouldn’t a company want to recruit the best people for the job? Competitive advantage, and a higher probability of meeting strategic objectives comes with attracting top talent, fostering innovation and diversity. Much like a well-built portfolio, diversification is one of the key ingredients to success. Skeptics would say that it is difficult to assess how well a company follows through on its stated D&I goals – and they would be right. It is one of the reasons why increasing transparency and disclosure by public companies, perhaps mandated by regulators, will help make this aspect of ESG easier to score and evaluate.
It was a three-day conference with innumerable highlights, but one thing is for sure - ESG is here to stay. The investors that seek out my services want to affect positive change with their capital and make a superior long-term risk-adjusted return while doing so. In one of the lunchtime ‘plenary’ sessions, RBC CEO Dave McKay outlined RBC’s ESG strategy on the heels of our announced $500 billion in sustainable financing by 2025 and updated Climate Blueprint. He summed up our corporate purpose and highlighted the clear links between ESG, corporate strategy, risk management and long-term performance. As an institution with a 150-year history, what we do in the coming decades will dictate the long-term future. To be able to have RBC support my clients in their financial needs aligns well with my own purpose and values as an advisor and hopefully serves as a call to action to anyone seeking to integrate responsible investing into their wealth management.