Royal bank of Canada Offers ESG 'Climate Modifer' Bonuses Top Execs Who Support ESG Goals

March 14th, 2023 9:36 AM

A “Climate Modifier” bonus for top executives is among the tactics being used to advance the Royal Bank of Canada’s (RBC) environmental, social and governance (ESG) goals, the bank revealed Monday, announcing the publication of its 2022 Climate Report and ESG Performance Report.

“These reports reflect the importance that RBC places on identifying, understanding and responding to the ESG topics that matter most to our stakeholders and our business,” RBC explains in its press release.

RBC goes on to tout its efforts to use its power as a financial institution to solve the world’s problems:

“They also reflect our belief that financial institutions can play a pivotal role in solving the challenges of today, and that our ability to manage ESG matters will be core to our long-term success.”

The bank says the bonus plan for its CEO and top executives in 2023 will employ a “Climate Modifier” component to advance its climate goals:

“For the 2023 performance year, we plan to include a climate modifier to be considered by the board when granting equity to the CEO and Group Executives. The climate modifier outlined in the 2022 Climate Report gives the board flexibility to make modifications to executives' Mid-Term Incentive and Long-Term Incentive awards, taking into consideration their actions supporting our climate strategy.

“We updated our primary Enterprise Policy on Environmental & Social Risk to reflect our enhanced climate commitments and objectives.”

The Climate Modifier will be used to adjust executives’ financial awards based on “their actions supporting our climate strategy,” according to the Climate Report:

“The introduction of the climate modifier will be embedded into our MTI (mid-term incentive) and LTI (long-term incentive) programs in order to give the Board flexibility to make modifications to executives’ MTI and LTI awards, taking into consideration their actions supporting our climate strategy. The climate modifier will also align the time horizons of our climate objectives with those of our MTI and LTI programs.”

What’s more, the bank’s release reveals that it has increased the importance of considering human rights issues in determining whether or not to grant loans:

“We enhanced our client and supplier risk assessment and due diligence processes to more fully identify and address potential human rights risks.”

The bank says it has a goal of achieving a “net-zero portfolio,” meaning a portfolio consisting of only organizations that have met, or on their way to meeting, the United Nations’ greenhouse gas emissions targets. For example, the portfolio would, ultimately, purge all dealings with companies involved in the production of traditional energy, and provide loans to only industries that support so-called “green energy.”

This would entail shifting its portfolio toward companies that are low emitters of carbon and other planet-warming greenhouse gases and those in the process of lowering their emissions over time to suit RBC’s standards.

“As one of the world’s largest banks, RBC is committed to integrating ESG factors into our business decisions and developing new capabilities through the solutions we offer clients – such as our sustainable finance offerings,” Lyndsay Patrick, Head of Strategic Initiatives & ESG, RBC Capital Markets, says in an description of RBC’s “sustainable finance” policies.

“Sustainable finance refers to financial activities that take into account environmental, social and governance (ESG) factors and the eligible transactions are outlined in the RBC Sustainable Finance Framework,” RBC explains.

Patrick provides an example of how sustainable finance can be wielded to increasingly reward or punish a borrower based on how well the borrower continues to comply with the bank’s climate agenda:

“Sustainability-linked finance incentivizes the issuer or borrower to achieve ambitious, pre-determined sustainability targets. For example, this could include a loan where the interest rate increases or decreases based upon the borrower meeting greenhouse gas emissions reduction targets or workforce diversity improvement targets.”

“At RBC Wealth Management (RBC WM) and RBC GAM, we use responsible investment (RI) as an umbrella term to describe a broad range of approaches for incorporating ESG considerations into our investment processes,” the bank’s Sustainable Finance Framework says, noting some of its methods of advancing ESG ideology:

  • “Systematically incorporating material ESG factors, where applicable, into investment decision-making to identify potential risks and opportunities and help improve long-term, risk-adjusted returns.”
  • “Applying positive or negative screens to include or exclude assets from the investment universe.”
  • “Investing in assets involved in a particular ESG-related theme or seeking to address a specific social or environmental issue.”
  • “Investing in assets that intend to generate a measureable positive social or environmental impact.”

The Royal Bank of Canada isn't alone in its efforts to mix business with politics in an effort to advance ESG ideology.

In February, a global asset management corporation handling total portfolio funds in excess of nine hundred billion dollars began providing financial incentives to its employees to make investment decisions that subordinate profit maximization to the advancement of environmental, social and governance goals.

AXA Investment Managers (AXA IM) announced that it is now providing financial incentives to its approximately four hundred senior executives based on reallocating portfolio fund investments to achieve ESG targets.

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