RBC Capital Markets Global Environmental, Social and Governance Conference

Feb 23, 2022

Good afternoon, everyone. It's great to join you today. My name is Patti Shugart, and I'm the Global Head of Corporate Banking at RBC Capital Markets. I hope you found this morning's conference sessions very informative and interesting, and I know it's been a really packed agenda so far. Financial institutions, and more specifically, banks, have a significant and important role to play in advancing progress on ESG and opportunities such as climate change, D&I, and many more. I'm so pleased to welcome Dave McKay, RBC's President and CEO, to speak with us today about the role of the bank and how RBC works with our clients and supports them and guides them to achieve their ESG targets and goals. Dave, you've been a real leader on this topic. You've been vocal for a number of years recognizing that now is the time for action. I really look forward to our discussion. Welcome, Dave, and thanks for being here today. I'll start with a global issue. The World Economic Forum's 2022 Global Risks Report highlighted that for the next five years, social environmental risks remain at the top of the respondents' concerns. More than ever, companies and leaders are increasingly expected to address these issues as part of their corporate strategy and evolve into more of a stakeholder-driven model. RBC has embraced so-called stakeholder capitalism for many years now, and our organization is guided by a really clear sense of our purpose and our values. How have conversations around ESG shifted over the course of the pandemic, and where have we refocused our efforts, if we have? Well, thanks, Patti. It's great to be part of the conference again this year. I think it's a really important conference, and you can see from all the attendees and the speakers that it's so important that we continue to push the dialogue on these topics. I think a lot's changed. As you referenced, we have kind of a four-pillar stakeholder model. We think about communities, clients, our employees, and our shareholders. I say as you look over the last two years, particularly during the pandemic, the focus on all ESG issues across all four stakeholder groups has fundamentally accelerated. Particularly in communities. As we think about the great reflection, as I call it, during the pandemic, having more time in society to think about where we are as a society across climate issues, across fairness and equality and inclusiveness in our society, and across governance issues. With that, we've seen tragic events that have really caused society to demand change. Tragic events on the climate side, whether it's fires in California and Australia, in Greece, that catalyzed demand for change. Tragic events in our community, whether it was George Floyd and the murder of George Floyd, and the awareness or the lack of awareness that we're not on a good path of inclusive development in our society and in fair development, and therefore a need to change. I think so much has changed across communities feeding into our employees demanding change and our clients demanding change across society. As I look at our shareholder group, I would say pre-pandemic, I had the odd question on climate, rarely a question on social or governance issues. I would say today, recently as last month, we're having dedicated meetings with our top investors on the talk of climate, social, and governance. They want to understand our plans. They want to understand how we're engaging in the organization to articulate where we're going to go and what role we're going to play in society and what the impact is on all our constituents that we just talked about. I think it's so important. That's just, to me, a signal of enormous change in society. Clients responded, our employees have responded, and our shareholders have obviously responded. It's certainly on climate, on the E, it's certainly on social governance. How are you doing with diversity in your organization? How do you deal with suppliers? How do you deal with businesses and your clients in your community? But also what's new is a focus on governance. How are we governing the organization? What's the role of the board when it comes to climate change? What's the role of your subcommittees, whether it's your governance committee? Do you have a climate committee and a climate change and risk committee? All these questions are coming up in meetings across a number of our constituents, but particularly shareholders. I would say there's been an enormous catalyst and accelerant of change across all those dimensions. Right. Dave, I'd love to come back to one of the key stakeholder groups that you referred to, and that being our employees and how important they are. How often sometimes they might be a little bit forgotten as we go through this ESG journey. Can you talk about how you feel as CEO, what is important, and how do you engage broadly with such a large employee constituency? Yeah. Thanks for bringing us back to that. Our employees have been through a lot. Whether it's our frontline employees who are dealing with clients who are stressed about their businesses or stressed about their personal lives and the risks of contagion, working face-to-face with the public in our branches, to working from home for the first time, to trying to do complex deals with our Capital Markets clients from home. Yeah trading from home, all of that. Our employees have been through an enormous change. There is a massive shortage, supply-demand imbalance between demand for talent in our society and the supply of talent. There's a lot of variables that have been accelerated through this pandemic. It all comes back to what do employees want from an organization? It's clear they want a couple of things. One, they want to work for an organization with purpose. Not just an articulated purpose on a piece of paper, but an authentic purpose that they can feel in the organization, and it's tangible. I think when we articulated our purpose eight years ago around helping clients thrive and communities prosper, and then how we detailed what did that mean and living that every day, that's been so important, I think, as a North Star with our values and helping our employees get through a very difficult two years and staying focused on our customers and staying focused on our community. I think that North Star, we talk about it a lot, but clients feel it, but employees need that North Star, and they rally around that North Star, and it's that culture they draw on through tough times. I think having that North Star really helped us because we started it eight years ago. It's deeply embedded in our values, our leadership model, and our culture, and I think it really helped our employee base and our organization get through the last two years. The other thing employees are increasingly asked for and what's changed through the pandemic is, and we see it in the Edelman Trust Barometer that comes out in January before the World Economic Forum every day, they're demanding that their organization, in particular CEOs, have a voice and a very public voice in these ESG issues around climate, around fairness, around inclusiveness, and around diversity. They want their CEOs to speak out and help lead and help articulate solutions in society and not just be a one stakeholder profit maximization model. If you do both of those things well and you engage your employee base in that journey, because they can be your most creative problem solver. From capital markets through to consumer products, our employees are coming up with great ideas on how to help our clients make this journey. It's those employees that will dictate the success of this journey as they work with all our clients on their climate and ESG journey. If you do those things, I think you'll have come through this pandemic really well, and you'll have a very optimistic, prosperous future. Yeah. No, I think they are challenging us to let them bring their true selves to work. Yeah. They definitely want authenticity in their leadership. Yeah. They want to feel like they can relate, and to obviously the CEO, but the entire management team. One of the things that personally I've found interesting and challenging at the same time has just been to bring as many diverse candidates into even the division that I run. As we all know, the research shows us that with more and different views and perspectives, you're going to get better solutions. At the end of the day, we're in the client business, so we want the absolute best people around the table to figure out how to solve a problem. So I feel it, and that's been sort of loud and clear from you to group executive right down through all levels of management. So that's really important. One thing employees really need from leaders and from CEOs is taking the time to explain why. Yeah. Why have we chosen this path? Why have we chosen this strategy? Why are we doing it this way? Once they understand why, you unlock them to be the problem solver and executing within your organization. That's such an important. Why have we chosen this D&I strategy? Why have we chosen this path? How we articulate the four pillars of climate. We've spent a lot of time explaining the why, engaging our employees in that, communicating, having climate days. Flattening the organization around these issues is part of bringing your whole employee population with you. Let's talk a bit about climate change first, and then we'll go into D&I. We've had a longstanding commitment to it. We were the first Canadian bank, chartered bank in Canada to adopt a comprehensive environmental policy, and it addressed all aspects of our business from internal operations to commercial lending. We expanded that climate strategy across the bank, including Capital Markets last year. On my corporate banking team, we've established an ESG group to work with our coverage officers and our clients to help them navigate and to have a good discussion and work through what they're trying to get done, as well as letting us enable us to solve our Net-Zero Banking Alliance commitment. We're actively engaging. The feedback has been really strong, and I'm actually really A, it's been positive. B, I'm surprised by how much they've already got done. I'm actually really encouraged because I think we're further along, certainly in some of the clients in the higher emitting sectors, that we're further along than people may realize. Maybe just a little bit about the enterprise-wide evolution. What has changed across our climate strategy, and why is now, and I think you've talked about that a little bit in your first answer, but why is now the right time to do it? Yeah. I think we did cover the now, and it's critical to all our stakeholders that we accelerate this, that we define. I think what's different over the last particularly two years, to your point, is it was very important that myself as a CEO articulate what role we were going to play for all our stakeholders in this change and what role we necessarily weren't going to play. There's so much change. This is the largest secular change we're going to see in our society in maybe a century. We have a 30-year journey to take together as a global society to create change across every dimension of our lives. Therefore, it's enormous, and it's complex, and it requires integration. Therefore, what role does a bank play, and what role does RBC play? We spent a lot of time with you and your team and with all stakeholders across the organization talking about the role we are going to play, and we defined it through four pillars. First and foremost, we have to start by taking care of our own house and reducing our own emissions. We have committed to do that over the next four or five years by 70%, largely through investing in new green energy, as our largest footprint coming out of a bank is the energy we use in our data centers and running our operations. First and foremost, reduce our own emissions to net zero, but in an accelerated way. That is not a high bar for a bank at the end of the day. The second major pillar is helping our clients understand their emissions, helping our clients understand how to put a program together, and measuring the progress our clients make in their own emissions, which is reflected in both our lending portfolio that you run, Capital Markets side, but also in our investment business. Yeah. It shows up in really two places in the organization. Our commitment through, as you said, our PCAF association, our signing the NZBA agreement, is to report on that progress and measure that progress and articulate are we on track, are we not on track, and work with our clients. I think that is a very important pillar is creating value for our clients through that pillar. The third pillar is enabling the transition through arranging financing, providing financing to that transition. The Capital Markets group was early on in us making a CAD 500 billion commitment to arranging that financing and supplying that financing critical. We think as a society, we might need CAD 100 trillion to CAD 150 trillion. In Canada alone, it could be CAD 2 trillion to CAD 3 trillion of financing required to enable all sectors of our economy to get to net zero. It is a significant step, and we were early in making that commitment of size. A really important pillar. The fourth pillar is because there is so much integration between business and government and citizens and NGOs, that we have a lot of policy decisions to make. We cannot make this journey solely through markets allocating capital. We have to manage demand and supply. We need policy change. We need risk measurement and risk management support from the government when key technologies are too immature to attract public capital. From that perspective, the role that RBC can play in influencing policy, helping design policy, helping create pathways with our clients and government is really important, and we take that on as one of the leading banks in the world and Canada's leading corporation. Absolutely. I would say that this is a massive change, and it's going to require just a tremendous amount of collaboration. As you said, it's too large for any one company or government or entity. As you look at this, how can we better balance working with our peers, so the other banks, and facilitating collaboration between the public and the private sectors while continuing to differentiate ourselves competitively? Is there a body or a consortium that we think is required, and what do you see needing to happen to move forward with that idea? It's a great question. When I look at the challenge in front of us as a society and a bank, we're managing some very complex variables. First, we have to take 7 billion people on this journey over 30 years to get to net zero. We have to transform every sector of our economy on the supply side. We have to influence demand as well and integrate that. We have to coordinate investment and policy across municipal, provincial state, national governments, and geopolitically, we have to coordinate. When you look at a problem that's that complex over that period of time with that many moving pieces, markets alone can't solve this. Markets are a big part of the solution, but we need a coordinating mechanism. I liken this to a post-war effort of reconstruction, where you need a public-private consortium that supersedes political cycles, supersedes CEO and business cycles. Because when you're on a 30-year journey, you can't afford to have whipsaw change in policy or tax policy or investment policy. When you're trying to attract CAD 150 trillion of capital to make this journey, you need stability. That stability, that planning cycle, that integration, I think is best captured in a public-private consortium, like a post-war consortium analogy that allows us to make smart decisions and talk to our citizens in each of our countries to say, "These are the options and the pathways that we have, and we should vote as citizens on the sacrifices, the changes, or the risks to that, and we should elect governments that represent how we want to take this journey as citizens." It's very complex. I see a coordinating mechanism playing a very important role in this. We've never taken a journey like this before. I would agree. I like the point of it being transcending all of that, CEOs or governments in the current governments in place. Shifting a little bit, just mindful of time, to the conversation around D&I. I know personally, from having worked with you for over a decade on RBC's Diversity Leadership Council, which you've chaired since you took over as CEO, I know how committed you are to making RBC a diverse and inclusive culture. In the summer of 2020, RBC announced a series of D&I goals related to Black and Indigenous and people of color, the representation of those groups within our senior and executive roles, as well as initiatives to advance inclusion across the whole bank. Can you tell us more about those commitments and goals and how we've performed against those targets? It's so important to the success of our organization to reflect the society we work in, to create an innovative and engaged culture within the organization. We need more diversity, and I think we've made a lot of progress as an organization on a number of fronts. I'm very proud of the progress we've made in my tenure on women in leadership, going from 36% to 46%. We have slipped, though, by a couple percent in the last six months, a big impact, obviously, of the pandemic. We want to regain that, and obviously, we need to get that 44% to 50%. We've given ourselves no more than three years to get there. It's a lot of change going on to do that and a lot of planning. I think from that perspective. On BIPOC inclusion in leadership and in our organization, we made a number of commitments, to your point, over the last two years, and I'm very proud of the progress we've made. We've moved BIPOC representation in senior management from 17% to 23% this year, and that was by making sure that our hiring practices represented over 30% of the population. We achieved that, and that allowed us to move quickly from 16% to 23%. But until we get to that 30%, we're not representative of the communities within which we operate. We're on a journey. We have work to do, but we've got a strategy to get there. I think we're really proud of that journey, and we've been recognized for the progress we've made by the Catalyst organization. In 2021, we were honored with the Global Catalyst Award for the work we've done in women in leadership in the organization broadly. We're very proud of that. We're number 2 in the world in Refinitiv Index on diversity, which measures the broad diversity we just talked about. When you get that type of recognition globally, it's because of the great work everyone, including yourself and all the leadership team, has done in really making meaningful progress. But it's not just the numbers. It's about inclusive diversity and people really having a say. I watch that through our employee surveys and how they respond. The numbers are one thing. They're important, but it's what people say when they get the roles. Am I included in decisions? Do I feel a part of the organization? Can I make a difference? Those numbers are almost as important or more important than our representation numbers. It's not just about hitting it. It's you can make a difference. You can have an impact. I feel included here. It's both those dimensions coming together that make me proud of the organization, and I think why we've excelled and outperformed as a bank. Absolutely. The other part of the D&I is just the focus on our youth and how important that is as a key pillar of our ESG strategy. We have something called RBC Future Launch. It is our commitment to helping young people prepare for a very fast-changing work environment. We did this five years ago. Again, what progress have we achieved, and how has our strategy shifted? Within that programming and that commitment, how can we ensure that all youth, including Black, Indigenous, and people of color, how do we know that they get the value of that commitment? Yeah, that is such an important question. For all of those who are not aware of our Future Launch commitment, it is a CAD 500 million commitment over 10 years to really help our youth in our communities prepare for the future of work and leadership across a number of dimensions. One, training, like that first internship, that co-op, work integrated learning and getting access to a job, their first job, and their first set of experiences is a part of it. Building a network is also really important, and the skills development that goes around a changing economy and the future of skills. We are committing CAD 50 million a year to doing that. We have connected with over 4 million youth now in the first five years. We have spent CAD 260 million of the CAD 500 million. We have created over half a million experiences for youth to get their first job and networking opportunities and obviously millions of training opportunities. From that perspective, we have had a great impact. When we survey youth, how did you feel about the programs you went through? Two-thirds say, "I feel much better prepared for the future of work." I think that is the design of the program. To your question, how are we pivoting that program specifically to help BIPOC youth in our society? Especially with COVID. Especially with COVID. How tough it's been on that generation of- They're isolated. Yeah. It's hard, it's digital, remote. How do you build a network- Right in a remote, work from home type of work in society? On the BIPOC side, we're carving out CAD 50 million to design specific programs around internships and training and skills to help BIPOC youth progress. We hope to reach 25,000 BIPOC youth through that carve-out program, really creating more fairness and equitable access to internships and jobs. Last year, we're really proud, we targeted that of all the summer students that we brought into the organization, which is in the thousands, we said we'd like to see 40% of those summer student programs go to BIPOC youth. We achieved over 50%. Putting it into motion, walking the talk, very proud. It's those types of programs that can make a huge difference. Everybody needs that first break. Right. We certainly saw that in 2021 as we started our summer recruiting and the focus, you could just feel it. The tone from the top definitely came down to the grassroots when we were doing the hiring. That's really terrific to see. You mentioned innovation and technology, and we know from our $2 trillion report that we can't get there. We can only get 75% of the way there with the current technology, and so we need to develop new technology to help us get that last 25%. When it comes to advancement in blockchain technology, artificial intelligence, the Internet of Things, how are we thinking about their potential for ESG-oriented uses or cases? How can they be used to actually help us address, for example, climate change challenges with technologies? Well, you've just kind of highlighted three fundamentally transformational technologies- Yeah that's going to impact every aspect- Yeah of our society, particularly as we bring 5G capability to IoT. But specific to your question around how do those technologies impact our climate journey, I think they're going to have significant impact. And how we're enabling that at RBC is we're very much focused on RBC Tech for Nature. RBC Tech for Nature is designed as a mechanism to invest in these emerging technologies, give them profile. We've invested over CAD 27 million in over 100, I think, 110 different technologies and initiatives, and it's so important. It's seed capital, in many cases. It's funding to grow. Now, one organization I'm more familiar with is Lake Winnipeg, and it runs through the foundation. The water sampling that goes on around the lake, and using blockchain technology, a distributed ledger, versus building a centralized ledger to allow different scientists and citizens and community members to measure water quality around a very large lake and upload that information in a distributed ledger, allowing centralized scientists to have a better understanding of the overall Right climate change impact People helping too, right water quality impact. You are just mobilizing an army through technology Yeah to participate in helping understand this journey and what a great technology to do that, and much cheaper to do that than building a centralized repository that requires remote technology to bring that in. Again, just enabling a broader part of society to participate. Just a great example of us understanding our planet better, understanding how we are emitting and contaminating our planet, and then how we are going to change that and measuring progress. I think it is absolutely critical in this journey, and we will not be able to make it, to your point Yeah without these new technologies. One of the things that we talk a lot about when it comes to climate solutions is the needs of our retail customers versus our commercial and corporate clients and versus institutional investors. You touched on what we are doing on the wealth management side. All of those needs are very different. Maybe could you just comment how we go after and try and serve each of those three client groups? From a climate perspective? From a client, yeah. The climate- Well, certainly as we think about the retail side and the mass consumer, that is where you start to get into demand influencing. How do consumers change their behavior, change their consumption behaviors or product choice? As a bank, through our loyalty programs, through the construct of our mortgages, through our life insurance programs, how can you incent consumers to choose and to manage their lives in a lower carbon footprint way? We are certainly looking at designing products from credit cards, loyalty programs, mortgage programs, small business lending, to incent customers to choose a journey. Because if we just manage the supply side of this equation, it is going to cost us that CAD 150 trillion. But if we can manage demand and consumer behavior at the same time as we manage supply, I think we have an opportunity to significantly reduce the time we get to our journey and the cost of that journey. So we have a role to play, certainly on the mass consumer side in influencing our customers on the demand side and rewarding them for changes where we can, and bringing in partners to create value there as well. On the small business commercial side, to your question, we have a huge role to play on the advisory side. We can bring in the knowledge of RBC by sector. We have a lot of industry expertise, helping them understand how to measure their GHG footprint, as we talked about, what options they have, what technologies are available. How good the data is. How good the data is. Yeah. Being a convener, the risks, providing financing to that, helping them measure and report. All of that creates enormous value for our client base, and we see ourselves playing a leading role in helping our clients make an orderly and successful journey in making the transition. So certainly, and to your point, on the Capital Markets side is the most advanced, I think, in clients thinking about the capitalization of their balance sheet, the funding they're going to need, investing in the transition, raising capital already to make that transition. Our CAD 500 billion commitment, which you and the team have put the work so well already, and integrating that across all the investment banking sectors and groups and making it part of our business model is really important in meeting that client demand. Yeah, and I think that end-to-end strategy is particularly as you look at agriculture, for example, and what a strategy or a plan would look like in terms of how we grow it, how we process it, how we distribute it. Right and just bringing the full spectrum of it to bear. Yeah. We're a couple of months into 2022, and I'm going to ask you what has surprised you probably other than Omicron, because boy did that come upon us all very, very quickly. What drives your sense of optimism right now and in a world that's been defined by so much uncertainty for the last two and a bit years? Can you talk a little bit more about what we've learned as an organization and how you see that coming to shape the future of our work? Yeah. I am really optimistic for 2022 and beyond. When I think about the next year, what makes me optimistic is vaccines work. Yeah. If you get your booster, with or without Omicron, you have a 90-plus percent chance of not being hospitalized and getting through it. Therefore, the healthcare outcomes, we are getting more confident about reopening our society. Many societies have already reopened, and managing to a positive healthcare outcome without mortality or serious or chronic illness has never been higher. I feel very optimistic about managing through our health outcomes. In the short term, I feel very optimistic about the opportunities for growth and inclusive growth. We have trillions of CAD of global cash sitting on consumer and business balance sheets. It is 300-plus billion CAD in Canada alone on consumer balance sheets. We have an enormous stimulus and stimulative opportunity here to continue to grow and accelerate growth. Demand is out there. While supply chains are struggling to meet that demand, when I talk to CEOs of a number of companies, we will probably bump through 2022, maybe into 2023 with some supply chain issues. But overall demand is there. The fiscal conditions are there to have strong, inclusive growth. I feel very good about the health and economic outcomes in the short term. In the longer term, what gives me real optimism is, as a society, as we just talked about, we were not on a path to sustainable growth and inclusive growth in our society. We have been shocked into acknowledging that over the last two years, and you see society, whether it is the corporate and public level or the government level, at all levels of society. Citizens are demanding a more sustainable long-term development, and that gives me enormous hope for the future of our society. From both those dimensions, I feel really good about the future. Yeah, I would say 2022 feels a lot stronger. I think people were waiting in the weeds a bit to see how 2021 would unfold, and there has definitely been very significant, certainly in the capital markets, it has been a very active time, lots of M&A activity. Candidly, we have done all of this with many people working from home for now two years. Who would have thought, is what we often say about who would have expected the pandemic, then who would have expected us to be a digital bank overnight, then who would have expected us to thrive through it, and our employees thrive through it. So, maybe a bit on our future of work. We have adopted the three-plus hybrid. I have been a big fan of work from home, but I also am a huge fan of getting back to the office. It is great to be here in our offices in Toronto. It is great to be this. This is fantastic. How are you going to navigate for over 80,000 employees, what the right mix of work from home and hybrid working, how do you see that unfolding? Obviously very different jobs, many jobs across the organization. I think you start with a number of principles and foundations. What do you want out of this? You need an engaged workforce, right? First, you need an innovative workforce. You need a collaborative workforce. We don't want to lose all the things that we had pre-pandemic. I think what we've learned through the last two years is there's a completely new way that we can do this in a hybrid world that I think increases engagement, increases sense of balance between work and family life. Less travel. Has a lower GHG footprint because there's less commuting. Yes. Is just as innovative, and develops relationships and builds the type of collaborative culture that you want. There is a hybrid world that we're seeking, and I honestly don't know the balance. I think it's a dynamic balance. It depends on stage 2 of career. It depends on project you're working on. Depends on what's going on this year in your deliverables, and it's going to be complex to start, but we'll figure it out. I'm approaching it with a real open mind to say there's a balance here. For some, it might be all at home because that's their comfort zone, the type of job. For some, it might be all at work. But for the majority, it's going to be some type of hybrid that gets us and achieves all those goals and all those benefits. I wish I was starting again in my career because I- I know. It's a pity. I think it's a better way to work. Yeah At the end of the day, I think we're going to be a better society and a better company for it. As you look back on the last couple of years, certainly you've had to lead and navigate and help all of us to do the same. On a personal note, what do you miss the most? Then what are you looking most forward to as we start to return to more travel and more working in the office? Just maybe a couple of personal reflections on how the pandemic that really came out of nowhere has shaped and changed how you think about things from the way you would've thought about them two years ago. I miss the people. I miss being on stage and looking out over with an employee group or a client group and seeing their reaction to what you say, then getting off the stage and going and talking and shaking hands and hearing personal stories. I really miss that. It's a big part of my job and what I enjoy, and why I joined RBC and why I joined a bank is to work with communities, to work with a broad range of clients. We work the entire economy at the end of the day, from the largest corporate to consumers, and I get to see them all. For me, the enjoyment comes from meeting them and hearing their stories or helping them. I feed off the energy of being in person. So I miss that. But I don't miss the travel as much. I don't want to go back to the world that we were where I was on the road so much because that was how you did your job. You had to be there in person for everything. There is a hybrid world that I think I will be happier in at the end of the day and get all the benefits of what I miss without having the physical drain and the sleep deprivation of being in so many different time zones and covering. I look forward to getting some of that back. There is a better way to work and a better way to lead an organization going forward. Well, that is terrific. I have really thoroughly enjoyed the conversation that we have had today. I wish you great success as we continue on our ESG journey, and I know the audience is very appreciative, so thank you very much. Thanks so much for the opportunity. Thank you.