RBC Global Asset Management: Measuring portfolio net-zero alignment

RBC Global Asset Management (RBC GAM)

Signatory type: Investment manager

HQ location: Toronto, Canada

AUM: US$484.2 billion (as at 31 December 2021; global assets across all affiliated entities)

RBC Global Asset Management (RBC GAM)^[1] is a provider of global investment management services and solutions to institutional, high-net-worth, and individual investors, with investment teams active across capital markets and asset classes. We have long had a focus on responsible investment through ESG integration, active stewardship and client-driven solutions and reporting.

 

Why we developed an approach to measuring net-zero alignment

RBC GAM recognizes the importance of the global goal of achieving net-zero emissions by 2050 or sooner in order to mitigate climate-related risks. This is described in Our Net-Zero Ambition and Our Approach to Climate Change. Our approach to responsible investment is built upon a core belief that integrating material ESG factors, including climate change, into our investment approach can enhance long-term, risk-adjusted returns. We support these beliefs by integrating material ESG considerations into our investment decisions for applicable types of investments^[2], and by using our influence as active investors to engage on this topic with the companies in which we are invested.^[3]

How we measure portfolio net-zero alignment

Investment teams assess and monitor climate-related risks and opportunities on an ongoing basis for applicable types of investments. This includes a quarterly climate dashboard that is produced for over 100 equity and fixed income strategies. The dashboard includes a suite of climate metrics that can be leveraged to measure portfolio net-zero alignment including:

• Greenhouse gas (GHG) emissions;
• Investments in issuers with climate targets;
• Temperature alignment scores – with a detailed breakdown across sectors and top holdings.

We recognize that the methodologies for measuring net-zero alignment of investment portfolios are still in development; our approach applies the recommendations of the Science Based Targets initiative (SBTi).

Figure 1 outlines the Weighted Average Carbon Intensity (WACI) of RBC GAM’s equity assets under management (AUM) (as of 31 December 2021, see appendix and RBC GAM TCFD 2021 Report for the scope of this analysis and details on the representative benchmarks used in the analysis). Across all portfolios, the WACI is largely driven by sector exposure, with the energy, utilities, materials and industrials sectors being the greatest contributors.

Figure 1: WACI of RBC GAM’s equity AUM. See the Appendix for scope of analysis and representative benchmarks

Source: RBC GAM

While GHG emissions analysis provides the foundation for uncovering climate-related risks and opportunities, it is a static and backwards-looking metric – offering a view on what a portfolio’s emissions have been, not necessarily what they will be in the future. For this reason, it is important to supplement this analysis with forward-looking metrics.

To this end, we look at our exposure to issuers who have established emissions reduction targets. This applies a forward-looking lens on the actions issuers are taking to align with a net-zero pathway. At RBC GAM, 23% (US$59.6 billion) of AUM in the scope of this analysis, which includes both equity and fixed income investments, is invested in issuers that have set, or have committed to set, a science-based or net-zero target that is independently verified by SBTi. Figure 2 provides the analysis for equity portfolios only.

As not all issuers choose to apply this voluntary standard, and some sectors are not yet eligible according to SBTi, we also track and monitor AUM invested in issuers with any carbon emissions reduction target, which represents 67% (US$174.4 billion) of AUM in the scope of this analysis, which includes both equity and fixed income investments. Figure 3 provides the analysis for equity portfolios only. Additional due diligence may be applied to evaluate whether these targets, which are not independently verified, are actually net-zero aligned.

Figure 2: Percentage of AUM Invested in issuers with Paris-aligned or net-zero targets (based on SBTi), by portfolio, as at 31 December 2021. See the Appendix for scope of analysis and representative benchmarks.^[4]

Source: RBC GAM

Figure 3: Percentage of equity AUM invested in issuers with carbon emissions reduction targets, as at 31 December 2021.^[5]See the Appendix for scope of analysis and representative benchmarks

Source: RBC GAM

GHG emissions and portfolio coverage provide a view on issuers’ emissions performance and commitments. We can supplement this analysis with a look at our portfolio’s temperature alignment – a modelled, forward-looking metric that indicates what the global temperature rise would be in 2100 if the global economy mirrored the portfolio (see Figure 4). It is worth noting that the Canadian equities portfolio, which has a higher GHG emissions intensity than the benchmark, has a lower implied temperature rise due to the commitments and actions being taken by underlying issuers to reduce their emissions. This demonstrates the importance of using multiple metrics when evaluating a portfolio’s current and future alignment.

Figure 4: Implied temperature rise, by portfolio, as at 31 December 2021. See the Appendix for scope of analysis and representative benchmarks

Source: RBC GAM

 

Example: RBC Global Equity team – Integrating net zero into investment decisions

The RBC Global Equity team tracks and monitors both the current and trend line GHG emissions of their portfolios and applies a set of six principal criteria^[6] to identify whether holdings in their portfolio are aligned, aligning or not aligned to net zero. This information may then be used to inform investment decisions and drives engagements with investee companies that have not yet established net-zero targets and action plans and/or those that are lagging peers. The six criteria are:

1. Ambition: A long-term 2050 goal consistent with achieving global net zero.
2. Targets: Short- and medium-term emissions reduction targets (Scope 1, 2 and material Scope 3).
3. Emissions performance: Current emissions intensity performance (Scope 1, 2 and material Scope 3) relative to targets.
4. Disclosure: Disclosure of Scope 1, 2 and material Scope 3 emissions.
5. Decarbonisation strategy: A quantified plan setting out the measures that will be deployed to deliver GHG targets, proportions of revenues that are green and, where relevant, increases in green revenues.
6. Capital allocation alignment: A clear demonstration that the capital expenditures of the company are consistent with achieving net-zero emissions by 2050.

As the materiality of climate change varies by sector, the framework is applied based on the significance of emissions to a company’s business model. Carbon-intensive companies (e.g. energy) are therefore required to meet all six criteria to be considered aligned with net zero, while less carbon-intensive companies must meet criteria 2-4 to be considered aligned. Companies that do not satisfy the team’s criteria are considered not aligned, while those that have made partial progress are considered to be aligning. Figure 5 identifies the number of holdings in a representative account of the RBC GAM Global Equity Concentrated Strategy that fit each of these categories.

Figure 5: RBC Global Equity team assessment of net-zero alignment, by number of holdings, for a representative account of the RBC GAM Global Equity Concentrated Strategy, as at 30 June 2022

While divesting from non-aligned companies would, in theory, enable the proportion of aligned holdings to quickly increase, this would not have a real-world impact on emissions as those divested shares may be purchased by less climate-aware investors. It may also create unintended systematic exposures with potentially negative consequences on the quality of investment returns. Consequently, the team favours engagement with investee companies as the best way to address the risks and opportunities around the energy transition, and as a means of reducing global emissions.

Appendix – Scope of assets included in portfolio analysis

The above portfolio analysis was conducted on 54% (US$260.9 billion) of RBC GAM’s total AUM, as at 31 December 2021, including both equity and fixed income.^[7] This represents 85% of RBC GAM’s equity investments and 38% of fixed income investments. Climate-related data coverage is available for 89% (US$231.0 billion) of the equity and fixed income AUM included in the scope of portfolio analysis. Please note that this case study is focusing exclusively on the equity portfolios that are included as part of the scope of analysis. See RBC GAM TCFD 2021 Report for details.

Representative benchmarks used in this analysis are as follows: Canadian equities (S&P/TSX Capped Composite Index); U.S. equities (S&P 500 Index); International equities (MSCI Europe, Australasia, Far East (EAFE) Index)†; Emerging Market equities (MSCI Emerging Markets (EM) Index, ex Asia-Pacific†); Asia-Pacific equities (MSCI All-Country Asia-Pacific Index).

† The representative benchmarks only include a sub-set of countries within the MSCI EAFE Index and the MSCI EM Index. The subset of countries included in the MSCI EAFE Index are: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and Israel. The subset of countries included in the MSCI EM Index are: Argentina, Brazil, Chile, Colombia, Czech Republic, Egypt, Greece, Hungary, Mexico, Peru, Poland, Qatar, Russia, South Africa, Turkey, and the United Arab Emirates. This approach was taken to avoid overlap between the MSCI EAFE Index, MSCI Emerging Markets Index, and the MSCI All-Country Asia-Pacific Index. To remain consistent, the same subset of countries was used across the international equities and emerging market equities portfolios.