RBC Global Asset Management: We want ‘consistent, comparable disclosure’ on ESG

As the 2019 proxy season comes to a close, Melanie Adams, vice president and head of corporate governance and responsible investment at RBC Global Asset Management (RBC GAM) – the asset management arm of Royal Bank of Canada – talks about having an increased focus on gender diversity at the board level, why the social side of ESG can be trickier to assess and what the asset manager wants more of when it comes to reporting material risks.

What were some of the top issues companies should have been keeping an eye on going into the 2019 proxy season, and how have these evolved in recent years? 
While the 2019 proxy season has closed, some of the issues heading into this year’s proxy season that were top of mind for companies included CEO compensation and gender diversity on boards (we continue to see less progress in this area than we would like). We also continued to see climate-related shareholder procedures. 

ESG issues like board diversity and climate change have been under the spotlight for a few years now. How has your focus and engagement around these issues evolved?
In terms of board diversity, this is the first year where our proxy voting guidelines have required two female directors on the board (ISS guidelines stipulate one female director). If a board has fewer than two women, we generally will vote against the nominating committee and we have had numerous engagements with companies on this topic.

As it relates to climate change, we continue to see shareholder proposals requesting more disclosure on how companies are addressing their material climate-related risks and opportunities. 

Are companies doing enough to communicate with their investors on these issues? What would you like to see them do more of or better?
Many companies are not doing enough to communicate with investors on these issues, particularly around their climate-related risks and opportunities. In general, companies are still learning about the best way to disclose these issues and investors would like to see consistent, comparable disclosure on the topic.

Other topics where we would like additional disclosure depends on the sector. We’re generally seeing more disclosure around gender diversity, but there has not yet been significant progress made to increase female representation on boards.

Talking about your approach to gender diversity, why have you decided to strengthen your stance against companies failing to recruit women to boards, and what engagement process do you follow before arriving at a point of voting against a company?
Many studies have shown that when a company has at least 30 percent female representation on a board, it results in improved financial results.

We strengthened our stance on board diversity because without this push companies weren’t doing enough. We’re hoping that taking a stronger position in our proxy voting (by requiring at least two women on boards) will result in companies taking steps in the right direction.

All proxy ballots are reviewed by our corporate governance and responsible investment team and voted in accordance with our custom proxy voting guidelines. In many cases our guidelines will stipulate a vote against management and, in many of these cases, our investment teams and/or our corporate governance and responsible investment team will engage with the board or management of the company, depending on the particular issue and circumstances. 

There are some cases where we make exceptions to our proxy voting guidelines, however, and in these cases the vote is discussed with our investment teams and put to our proxy voting committee (which includes the chief investment officer). 

Companies often seem to be more comfortable reporting on and engaging around the E and G issues of ESG – with the social side being perhaps less easily quantifiable. What’s your experience here and can you share any specific examples of companies that have impressed around ESG reporting?
I agree with this. The social side is less quantifiable and in many cases it is more difficult to understand social risks for a company. For example, we don’t have a direct line to a supplier to understand whether there are material supplier risks. We need to rely on a company’s disclosure and engagement with the company to understand what and how it is addressing as its social risks and opportunities.

[In terms of good examples], several companies in the resource sector are making a good effort to disclose the social risks, such as mining companies and how they engage with local communities. That’s critical for investors.

There are some companies across all sectors that have done a good job disclosing employee health and safety risks but we would like to see technology companies get more comfortable disclosing their cyber-security and privacy risks – we don’t find these are very well disclosed.

Outside of these key points, are there any other issues you’d like to see companies engaging around or improving engagement on?
At RBC GAM we continue to do a good job on the G – we talk a lot about gender diversity and CEO compensation but there needs to be more dialogue around the social risks that are material for companies. Where there are material risks (via the supply chain or privacy risks, for example) we should be having more meaningful conversations.