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  • RBC Emerging Markets Equity Environmental, Social & Governance Report 2018

    This information is intended for Institutional Investor use only. Not for public distribution.

    This material has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and is not

    intended to be a solicitation for any product, securities or service.

  • Contents Foreword ....................................................................................................................

    Our approach .............................................................................................................

    Our framework ............................................................................................................

    ESG engagement cases ...............................................................................................

    Proxy voting ................................................................................................................

    Country level ESG ........................................................................................................

    Intangible assets ........................................................................................................

    Family-owned companies in emerging markets ...........................................................

    Positives and negatives of different management incentive schemes ..........................

    The anti-plastic revolution ..........................................................................................

    Investment implications of climate change .................................................................

    Case Study: Pacific Basin shipping ...............................................................................

    Case Study: Amorepacific .............................................................................................

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  • RBC Emerging Markets Equity – 2018 ESG Report

    5

    Foreword

    This is our third annual environmental, social and governance (ESG) report.

    While sustainability has been an important part of our investment process since the inception of our

    Emerging Markets Equity strategy in April 2010, our ESG efforts have progressively evolved over the past

    few years. We have continued to develop our knowledge in key areas of ESG, and have expanded our

    activities as active owners.

    Notably, we feel that as active owners we can be more effective in key areas of ESG. We are better able to challenge governance issues such as executive remuneration, board leadership and effectiveness, climate change strategy, and ESG disclosure.

    During 2018 we have increased our efforts to become a more effective active owner and we intend that to continue into 2019. As part of our commitment to engagement, we have improved the process by which we examine and vote proxies. We also have in place a more focused approach to engagement to target specific areas: executive remuneration, board and workforce diversity, and ESG disclosure. Looking ahead to 2019, we plan to continue our focused approach to engagement, adding engagement on climate change to the existing focus and adding an emphasis on the consumption of plastic. Furthermore, we have taken steps to enhance our process to monitor and measure the effectiveness of our engagement efforts.

    For a long time, the RBC Emerging Markets team has believed that there are actions we can take as a team to support ESG principles beyond those already in place through our investment decisions. Recently, following a long selection process, we have started to support a Latin America-focused charity called La Vida which has a strong focus on youth. This is a way for us to give something back to the countries where we invest. We are looking forward to increasing our commitment to La Vida’s programme in 2019.

    Incorporating ESG into our investment activities is a dynamic and evolving process. We have made good progress but we recognise the need to continue our initiatives in order to continue to expand the scope of our ESG programme further. We hope that you enjoy these insights into our activities and achievements, and we welcome any feedback on how we can improve our future efforts.

  • RBC Emerging Markets Equity – 2018 ESG Report

    6

    Our approach to responsible investment

    Integration

    ESG factors can have a material impact on shareholder value and long term investment performance. ESG analysis can

    contribute to identifying long term industry leaders and potentially reduce investment risk by providing greater insight into how

    companies operate. The strength of a company’s competitive position and the management of ESG risks and opportunities

    have become more important than ever, and are key to supporting long term sustainable returns. The inclusion of these ESG

    factors in the investment process has consequently become crucial.

    Benefits

    Stronger ESG tends to correlate with higher profitability and cash returns. Companies in the first quartile, in terms of their focus on ESG issues, on average generate Cash Return on Capital Invested (CROCI) that is 25% higher than the sector average1.

    Higher cash returns

    High return companies typically maintain those returns for longer when they have good quality management teams. Our research shows that a company which has first quartile ESG scores sustains above-sector-average CROCI for almost twice as long as the average.

    More durable returns

    Approach

    We define responsible investment as investing in those companies that are committed to responsible business practices in terms of environmental, social, and corporate governance considerations, as well as where there is a culture of excellence and a strong capital discipline.

    Responsible investment

    We do not exclude particular companies from our investable universe on the basis of their participation in certain industries. Rather, we review how companies deal with ESG factors and integrate that assessment into our investment process to support our long-term bottom-up stock selection.

    ESG integration

    Our primary source for gathering information on how a company deals with ESG factors is engagement with management, which may take the form of face to face company meetings or telephone conversations, and deep analysis of a company’s financial statements and corporate sustainability strategy from its published reports.

    ESG analysis

    1Goldman Sachs, 2012.

  • RBC Emerging Markets Equity – 2018 ESG Report

    7

    Our philosophy is to invest in companies that have a high and sustainable Return on Investment (ROI). The majority of

    our bottom-up research effort goes into assessing the sustainability element of a company’s returns and we conduct this

    assessment in a very holistic and comprehensive way. We consider the evaluation of ESG factors, along with other factors

    such as management (ESG is in itself an indication of management quality), market share, barriers to entry, balance sheet

    strength, cash generation and profitability when determining the sustainability of a company’s returns.

    The majority of our bottom-up research effort goes into assessing the sustainability element of a company’s returns and we do that in a very holistic and comprehensive way.

    Over longer term horizons, earnings growth tends to generate shareholder value and drive equities performance to a greater extent than multiples. A company that has higher and more durable returns will, by definition, generate stronger earnings growth which will in turn lead to higher equity returns1.

    Stronger earnings and performance

    Investors perceive that a company with a strong ESG focus will have a lower risk profile and, consequently, a lower cost of capital1.

    Lower cost of capital

    Why it matters

    We expect global GDP in the next three decades to exceed the total output generated over the last two millennia. Exponential growth and finite supply of human capital, financial capital, natural resources and the environment’s capacity to absorb the consequences of growth (greenhouse emissions, pollution and waste production) are increasingly challenging the financial success of many businesses.

    Growing demand, finite supply

    Cost inflation, rising capital intensity and increasing competition are diluting the benefits of demand growth. As demand rises, growing environmental and social tensions are introducing new cost pressures and market opportunities across industries like never before. The strength of a company’s competitive position and its management of environmental and social risks and opportunities have become more important than growth exposure in isolation. ...

    Profiting from growth is harder

    1Goldman Sachs, 2012.

  • RBC Emerging Markets Equity – 2018 ESG Report

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    Rather than having dedicated ESG

    analysts, all team members perform

    and integrate ESG analysis in their work

    when researching a stock. This structure

    allows us to better value and assess

    stocks, to completely integrate ESG

    factors into our investment process,

    and to meaningfully engage with the

    com

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