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RBC Global Asset Management

PRI reporting framework 2019

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

The starting investment universe for our designated socially responsible strategies is reduced to exclude companies that manufacture and/or provide services for alcohol, gaming, military weapons, adult entertainment, tobacco and cannabis products. In addition we also apply a qualitative screen that eliminates companies with poor practices in the areas of community, corporate governance, employee relations, environment, human rights, and product safety.

When we control the investment policy for a portfolio, we will not knowingly invest in companies whose business activities would contravene the prohibitions contained in the Anti-Personnel Landmines Convention or the Convention on Cluster Munitions.

The percentage reduction (%MV) figure of 20% refers to the percentage of our socially responsible investment global equity strategy's benchmark excluded by the screening criteria. Holdings data are as at December 31, 2018.

Specify the percentage reduction (+/- 5%)

20 %

Describe any alteration to your investment universe or other effects.

For our fossil fuel free global equity strategies, the strategies will not invest in issuers or investment vehicles that are directly involved in extracting, processing or transporting coal, oil, or natural gas, or, for some strategies, issuers included in the Carbon Underground 200. Companies that fall within these categories are eliminated from the strategy's investment universe.

Our Access Capital Community Investment strategy, available in the United States, pursues impactful investments that help build stronger communities through their support of low-and moderate income home buyers, affordable rental housing units, small business administration loans and economic development projects. Similarly, the RBC Impact Bond strategy invests in securities with the intention of generating net-positive social and environmental impacts that produce competitive financial returns.

Lastly, RBC Vision Canadian Equity Women’s Leadership strategy, available in Canada, was launched in 2018 and focuses on companies domiciled in Canada that have demonstrated commitment to gender diversity as part of their approach to corporate governance. As a result, eligible companies must either have three female directors on their board, a combination of two female directors and at least one woman in an executive leadership position, or have 30% of its board represented by female directors.

Select which of these effects followed your ESG integration:

          ESG factors are part of the risk assessments done for prospective and existing investee companies and will also inform our proxy voting and ESG engagements.
        

12.2. Additional information.[Optional]

RBC GAM also employs norms-based screening to all of its investments.  No RBC GAM investment team will knowingly invest in companies associated with the production, use or distribution of anti-personnel land mines or cluster munitions. These exclusions only apply when we control the investment policy for a portfolio. For mandates where we do not control the investment policy, our clients may request different exclusions or no exclusions. We have engaged an independent third party research provider to provide us with a list of companies that should be excluded on the basis of this policy, which is updated quarterly.  RBC GAM has limited the AUM included in “screening’ to our negatively screened socially responsible investment funds.


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG issues that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Our Asian Equities team initially flagged an Indian service provider for its strong sales and margin growth. However, the team uses an internal scoring model to flag instances of aggressive accounting and ESG issues to complement the team's fundamental analysis (which may include engagements with companies and industry experts as well as on-site visits). After the initial positive flags, the team's follow-up analysis revealed questionable accounting and corporate governance practices.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Ultimately, the team decided not to invest in the issuer despite indications that the stock would perform well. In this case, concerns over aggressive accounting, corporate governance and potentially inflated sales figures were too substantial.

ESG factor and explanation

Our Emerging Markets Equity team continues to focus in on the climate-related risks and opportunities facing their investments. In 2018, the team took a deeper dive into the industry-level implications of climate change and communicated its findings with clients in its Annual ESG Report.

Overall, although climate-related impacts may differ by industry or even by individual company, the team found potential impacts on a variety of industries - a finding we deem to be indicative of the systemic nature of climate change.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

The research impacted the team's investment views on various industries, with the integration of those views likely to take place for the foreseeable future as industries continue to adapt. For example, the team believes that the energy sector will likely experience the continued penetration of renewable energy, such as solar and wind. Energy storage is set to be a key theme, notably hydro, battery and hydrogen, the latter two still very nascent. Fossil fuel still underlies approximately 85% of the world’s energy consumption; however, the team believes this will have to change if the Paris goals are to be met. Consequently, peak demand for fossil fuel may arrive in the coming years. In emerging and frontier markets, the team expects demand for fossil fuels to continue to rise, although their share of total energy demand will fall. This transition will affect resource-rich countries the most, the majority of which are emerging or frontier markets.
 

ESG factor and explanation

Our Global Equity team had multiple engagements with management of a UK chemicals company, including a meeting with the CEO. Although meetings covered a range of topics, including board independence, the team hoped to further inform its views on innovation and research and development at the company. The engagements reaffirmed the team's view that the company is an industry leader in these areas, providing the company with what the team views to be a contingent asset (ie has stock appreciation potential). In a later meeting, the team was able to gain further information on the company's approach to ESG, and was pleased to see that the company planned to report on the UN-sponsored Sustainable Development Goals in its 2018 report.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Extensive engagements with the company reinforced the team's view that company culture is very strong and unique, and that sustainability is a key priority for management. Further clarity on these positive characteristics allowed the team to integrate these details into its valuation, ultimately impacting allocation to the stock in the strategy.

ESG factor and explanation

As part of our periodic review of a Canadian equity strategy employing an exclusionary screen, our investment teams determined that our ESG research provider's assessment did not fully account for an investee company's recent commitments. Specifically, the materials company had supply chain activities in a politically-contested region (the ruling government in the region imposed human rights violations on the local population). Due to government ownership of one of the company's suppliers, the ESG research provider viewed the company as contributing to the ongoing controversy.

However, after engaging with the company, our investment team gained further clarity on the company's plans to transition its sourcing away from the government-owned supplier. The company had informed the supplier and the transition was already underway. In addition, the CGRI team had previously engaged with the company and found that disclosure on the issue was strong, an independent third party auditor was used and the supplier's involvement in any human rights concerns were limited to government association.

ESG incorporation strategy applied Screening

Impact on investment decision or performance

As a result of the company's plans and existing practices, a temporary exemption was applied, rendering the company eligible for inclusion in the investment strategy. However, the investment team continues to monitor developments to ensure that the company adheres to the plans it has disclosed.

ESG factor and explanation

In light of regulatory changes and consumer sentiment, our North American Equity team pays particularly close attention to the carbon intensity of utilities companies. Specifically, the team considers the transition of companies' power fleets from carbon-intensive sources such as coal to low carbon (ex: natural gas) or renewable sources. In general, the team believes that companies better positioned to transition to cleaner energy sources have a competitive advantage over peers in the rapidly shifting political and regulatory landscapes. Accordingly, the team sought further information from a Canadian utilities company utilizing thermal coal for energy production in response to recent regulatory changes, including carbon taxes.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Further analysis and engagement with the company provided additional details on the company's plans to transition its power fleet from coal-based to utilizing natural gas and renewable energy sources. The company sees an opportunity for significant growth within the renewable energy space both in the province and abroad as it plans investments in both current and future solar and wind projects throughout North America.

13.2. Additional information.[Optional]


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