Royal Bank of Canada (RY) Earnings Call Transcript & Summary

[Presentation] 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, diversity and inclusion 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. So I really look forward to our discussion. So welcome, Dave, and thanks for being here today.

So I'll start with a global issue. The World Economic Forums 2022 global risk report highlighted that for the next 5 years, social and 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. So 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 has changed. As you referenced, we have kind of a 4-pillar stakeholder model. We think about communities, clients, our employees and our shareholders. And I say, as you look over the last 2 years, particularly during the pandemic, the focus on all ESG issues across all 4 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. And 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 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. So I think so much has changed across communities, feeding into our employees demanding change and our clients demanding change across society. And 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, and they want to understand their 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. So I think it's so important. And so that's just, to me, a signal of enormous change in society. Clients responded, our employees have responded and our shareholders have obviously responded. And it's certainly on a climate on the E -- it's certainly on social governments, how are you doing with diverse in the organization. How you deal with suppliers, how do you deal with businesses and your clients and your community, but also what's new is a focus on governance, how it's governing the organization. What's the role of the board when it comes to climate change. What's the role of your sub committees or 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 constituents, but particularly shareholders. So I would say there's been an enormous catalyst and accelerant of change across all those dimensions.

So 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. And how often sometimes, they might be a little bit forgotten as we go through this ESG journey. So can you talk about how you feel as CEO, what is important? And how do you engage broadly with such a large employee constituency.

Yes, such a -- 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 business 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, trading from home, all of that, our employees have been through an enormous change. There is a massive shortage, supply-demand imbalance between the demand for talent and our society and the supply of talent. So there's a lot of variables that have been accelerated through this pandemic. And as you -- it all comes back to what do employees want from an organization. And 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. And I think when we articulated our purpose 8 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 2 years and staying focused on our customers and focused on our communities. So 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 is they draw on through tough time. So I think having that North Star really helped us because we started 8 years ago. It's deeply embedded in our values, our leadership [ model and ] culture. And I think it really helped our employee base and our organization get through the last 2 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 Index that comes out in January before the World Economic Forum every day, they're demanding that their organization and particularly CEOs have a voice and a very public voice in these ESG issues around climate, around fairness, around inclusiveness, around diversity. They want their CEO 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 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 come through this pandemic really well, and you'll have a very, very optimistic prosperous future.

Yes. No, and I think they are challenging us to let them bring their true selves to work, and they definitely want authenticity in their leadership. They want to feel like they can relate and to, obviously, the CEO, but the entire management team. And one of the things that personally I 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, we're going to get better solutions. And at the end of the day, we're in the client business. And so we want the absolute best people around the table to figure out how to solve the problem. So I feel it and certainly -- and that's been sort of loud and clear from you to group executive write-down through all levels of management. So that's really, really important.

One thing employees really need from leaders and from CEOs is taking the time to explain why. Why have we chosen this path? Why have we chosen the strategy? Why are we doing it this way? And once they understand why you unlock them to be the problem solver and executing within your organization, that's such an important -- and so why have we chosen this D&I strategy, why have we chosen this path, how we articulate the 4 pillars of climate. We spent a lot of time explaining the why engaging our employees and that communicating [ hubbing ] 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. So obviously, we've had a long-standing 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. So 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. And 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. So 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?

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, 2 years, to your point is it was very important that myself as a CEO, articulate what role we're going to play for all our stakeholders in this change and what role we would necessarily were going to play. There's so much change. This is the largest secular change we're going to see in our society and 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. And therefore, it's enormous, and it's complex, and it requires integration. Therefore, what role does a bank play and what role does RBC plays. So we spent a lot of time with you and your team and with all stakeholders across the organization, talking about the role we're going to play and we defined it through 4 pillars. First and foremost, we have to start by taking care of our own house and reducing our own emissions. And we've committed to do that over the next 4 or 5 years by 70%, largely through investing in new green energy as largely our largest footprint coming out of a bank is the energy we use in our data centers and running our operations. So first and foremost, reduce our own emissions to net-zero, but in an accelerated way. That's 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 market side, but also on our investment business. So it shows up in really 2 places in the organization. And our commitment through, as you said, our PCAF association are signing the NZBA agreement is to report on that progress and measure that progress and articulate, are we on track or we're not on track and work with our clients. So I think that's 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. Capital Markets Group was early on and thus making a $500 billion commitment to arranging that financing and supplying that fund is critical. And we think as a society, we might need $100 trillion to $150 trillion in Canada alone. It could be $2 trillion to $3 trillion of financing required to enable all sectors of our economy to get to net-zero. So it's a significant step, and we were early in making that commitment of size. So a really important pillar. And the fourth pillar is because there's so much integration between business and government and citizens and NGOs that we have a lot of policy decisions to make. It's not solely -- we can't 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. So from that perspective, the role that RBC can play an 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 in Canada's leading corporation.

Absolutely. And I would say that this is a massive change. It's going to require just a tremendous amount of collaboration. As you said, it's too large for any 1 company or government or entity. So as you look at this, like 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. So 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. When you look at 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. Or 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 $150 trillion of capital to make this journey, you need stability. And 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 risk to that, and we should elect governments that represent how we want to take this journey as citizens. It's very complex. So I see a coordinating mechanism playing a very important role in this. We've never taken a journey like this before.

I would agree. And I like the point of it being transcending all of that CEOs or governments and the current government in place. So shifting a little bit, just mindful of time, to the conversation around diversity and inclusion. And 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. So can you tell us more about those commitments and goals and how we performed against those targets?

It's so important to the success of our organization to reflect the society we're working 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 in a number of fronts. So very proud of the progress we've made in my tenure on women leadership going from 36% to 46%. We have slipped though by a couple of percent in the last 6 months, so a big impact, obviously, of the pandemic. We want to regain that. And obviously, we need to get that 44% to 50%. And we've given ourselves no more than 3 years to get there. And there's a lot of change going on to do that and a lot of planning. So 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 2 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. So 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. So we're on a journey. So we're certainly kind of -- we have work to do, but we've got a strategy to get there. So I think we're really proud of that journey. And we've been recognized for the progress we've made by the Catalyst organization. We [ won ] 2021, we were honored with the Global Catalyst Award for the work we've done in women and leadership in the organization broadly. So we're very proud of that. We're #2 in the world in Refinitiv Index on diversity, which measures the broad diversity we just talked about. So when you get that type of recognition globally, it's because of great work, everyone, including yourself and all the leadership team has done and really making meaningful progress. But it's not just the numbers, it's about inclusive diversity. And people really having us say, and I watch that through our employee surveys and how they respond. So the numbers are one thing. They're important, but it's what people say when they get their roles, am I included in decisions. Do I feel a part of the organization? Can I make a difference? And those numbers are almost as important or more important than a representation numbers. It's not just about hitting it. You can make a difference. You can have an impact. I feel included here. So it's both those dimensions coming together that make me proud of the organization. I think why we've excelled and outperformed as a bank.

Absolutely. And the other part of the D&I is just the focus on our use and how important that is as a key pillar of our ESG strategy. We have something called future -- RBC Future Launch. It's our commitment to helping young people prepare for a very fast-changing work environment. So we did this 5 years ago, again, what progress have we achieved? And how has our strategy shifted? And then within that programming and that commitment, how can we ensure that all [ use ] including black and indigenous and people of color. How do we know that they get the value of that commitment?

Yes, that's such an important question. So for all of those who aren't aware of our future launch commitment, it's a $500 million, our 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, that first internship at co-op, work integrated to learning and getting access to a job, their first job and their first set of experiences is part of it. Building a network is also really important. And the skills development that goes around the changing economy in the future of skills. And we're committing $50 million a year to doing that. We've connected with over 4 million youth now in the first 5 years. We've spent $260 million of the $500 million. We've created over 0.5 million experiences for youth to get their first job and networking opportunities and obviously, millions of training opportunities. So from that perspective, we've had a great impact. And when we survey youth, how do you feel about the programs you went through, 2/3 say I feel much better prepared for the future of work. So I think that's the design of the program. But to your question, how are we pivoting that program specifically to help and BIPOC society...

And especially with COVID and how it's been on that generation...

They're isolated and it's hard and it's digital, remote, how do you build a network in a remote work-from-home type of work in society. On the BIPOC side, we're carving out $50 million to design specific programs around internships and training and skills to help BIPOC youth progress. And we hope to reach 25,000 BIPOC youth through that [indiscernible] program, really creating more fairness and equitable access to internships and jobs. And 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 while we achieved over 50%. So putting it into motion, walking the talk, very proud. And it's those types of programs that can rate make a huge difference. Everybody needs that first break.

We certainly saw that in '21 as we started our summer recruiting and the focus, you could just feel it. So the tone from the top definitely came down to the grassroots when we were doing the hiring. So 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. So we need to develop new technology to help us get that last 25%. So 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. So how can they be used to actually help us address, for example, climate change challenges with technologies?

You just kind of highlighted 3 fundamentally transformational technologies that's going to impact every aspect 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 have significant impact. And how we're enabling that at RBC is we're very much focused on RBC Tech for Nature and RBC Tech for Nature is designed as a mechanism to invest in these emerging technologies, give them profile. We've invested over $27 million in over 100 -- I think 110 different technologies and initiatives. And it's so important. It's C capital in many cases. It's funding to grow. One organization I'm more familiar with is like Winnipeg and runs through the foundation. And 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 climate change impact and water quality impact and you're just mobilizing an army through technology 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. So again, just enabling a broader part of society to participate. So now just a great example of us understanding our planet better, understanding how we're emitting and contaminating our planet and then how we're going to change that and measuring progress. So I think it's absolutely critical in this journey, and we won't be able to make it to your point without these new technologies.

And 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. And you touched on what we're doing on the wealth management side. But all of those needs are very different. So maybe could you just comment how we go after and try and serve each of those 3 client groups?

From a climate perspective?

From a climate, yes.

Certainly, as we think about the retail side and the mass consumer, that's where you start to get into demand influencing. How do consumers change their behavior, change their consumption behaviors or product choice. And as a bank, through our loyalty program, 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. So we are certainly looking at designing products from credit cards, loyalty programs, mortgage programs, small business lending to incent customers to make -- to choose a journey. Because if we just manage the supply side of this equation, it's going to cost us at $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 and influencing our customers on the demand side and we're 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, 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, then to your point on the capital market 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 and raising capital already to make that transition, our $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 a part of our business model is really important in meeting that client demand.

Yes. 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 and just bringing in the full spectrum of it to bear. 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. But what drives your sense of optimism right now. And in a world that's been defined by so much uncertainty for the last 2 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.

Yes. I am really optimistic for 2022 and beyond. When I think about the next year, what makes me optimistic is vaccines work, right? And 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 health care outcomes, we're getting confident about reopening our society, many societies have already reopened and managing to a positive health care outcome without mortality or chronic illness is never been higher. So 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've got trillions of dollars of global cash sitting on consumer and business balance sheets. It's $300-plus billion 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. And while supply chains are struggling to meet that demand and when I talk to CEOs of a number of companies, we'll 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. So I feel very good about the health and economic outcomes in the short term. And 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've been shocked into acknowledging that over the last 2 years. And you see society, whether it's the corporate and public level or the government level at all levels of our society and citizens are demanding a more sustainable long-term development. And that gives me enormous hope for the future of our society. So from both those dimensions, I feel really good about the future.

Yes. And I'd say '22 feels a lot stronger. I think people were waiting in the weeds a bit to see how '21 would unfold. And there's definitely been very significant -- certainly in the capital markets, it's been a very active time. Lots of M&A activity. And candidly, we've done all of this with many, many people working from home for now 2 years. And so I -- who would have thought is what we often say about who would have expected the pandemic and then who would have expected us to be a digital bank overnight, and 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. I mean we've adopted the 3-plus hybrid. I've been a big fan of work from home, but I also am a huge fan of getting back to the office. It's great to be here in our offices in Toronto. This is fantastic. And so how are you going to navigate for over 80,000 employees? What's 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, like what do you want out of this? You need an engaged workforce, right? First, you need an innovative workforce. You need a collaborative workforce. So we don't want to lose all the things that we had pre-pandemic. But I think what we've learned through the last 2 years is there's a completely new way that we can do this in a hybrid world that I think increases engagement, increases a sense of balance between work and family life, less travel, has a lower GHG footprint because there's less commuting, is just as innovative and develops relationships and builds the type of collaborative culture that you want. So there is a hybrid world that we're seeking. And I honestly don't know the balance. And I think it's a dynamic balance. It depends on stage 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. So I'm approaching it with a real open mind to say there's 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 know it's a -- it's a better way to work at the end of the day. And I think we're going to be better society, a better company for it.

And as you look back on the last couple of years and certainly, you've had to lead and navigate and help all of us to do the same. On a personal note, have you -- what do you miss the most. And then what are you looking most forward to as we start to return to more travel and more working in the office. So 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 have thought about them 2 years ago.

I miss the people. I miss being on stage and looking out over whether an employee group or a client group and seeing their reaction to what you say and 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. And for me, the enjoyment comes from meeting them and hearing their stories or helping them. And I feed off the energy of being in person. So I miss that. But I don't miss the travel as much. So it's -- 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's a hybrid world that I think I'll be happier in at the end of the day and get all the benefits of what I missed without having the physical drain and the sleep deprivation of being in so many different time zones and coming. So 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. So I've really thoroughly enjoyed the conversation that we've 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.

Thanks so much for the opportunity.

Thank you.