Industry Update Financials 22 July 2020 Scott Chan, MBA, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.869.3549 Pratik Agarwal | Associate | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.869.7348 Nicolas Racine | Associate | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.867.6108 Company Rating Price Target Canadian Banks Financials ESG themes RY-TSX Hold C$94.94 C$95.00 Insurance Key themes impacting the sector MFC-TSX Buy C$19.04 C$22.00 A growing number of Financials companies are increasingly adopting ESG practices Priced as of close of business 20 July 2020 in their decision-making, in response to larger regulations around compliance and disclosure, and to the expectations of investors and other stakeholders. Evidence suggests a strong correlation between the robustness of the ESG framework and the long-term financial performance of these companies. Based on management expectations and current trends, we identify three ESG factors impacting companies in our coverage: (1) diversity and inclusion; (2) sustainable financing; and (3) climate change. We have selected Royal Bank of Canada and Manulife Financial as companies taking significant and measurable steps toward driving these changes. Diversity and Inclusion At both RBC and MFC, women account for >55% of the workforce, with a significant proportion in middle management and executive positions. At RBC, visible minorities account for ~35% of the workforce and a similar proportion of middle management and above. People with disabilities and the indigenous group occupy 7% and 1.3% of the workforce, respectively. Over the last few months, RBC has committed $1.5M to fight racism against Black people and another $100M over five years in small business loans to Black entrepreneurs. The bank also committed 40% of all its summer opportunities to BIPOC youth (black, indigenous, & people of color). At MFC, women comprise 43% of middle to senior management, with a similar proportion as independent board members. This month, MFC committed to increasing BIPOC representation in the senior management roles by 30% by 2025, in addition to hiring at least 25% BIPOC in its Graduate program. Sustainable Financing RBC had ~$26B invested in sustainable finance (e.g., green bonds, affordable housing, renewable energy) as of F2019 and has committed a cumulative sum of $100B by 2025. During the year, the bank established the Sustainable Finance Group within the Capital Markets division in response to increasing demand for ESG products from clients. The firm initiated a Clean Energy Vehicle Financing Program, as the demand for hybrid and electric vehicles is on the rise. MFC was the first global insurer to issue a green bond (2017) and had >$1B in outstanding green bonds as of 2019. In 2019, MFC invested $1.2B in renewable energy and energy-efficient projects, bringing the total to $14.8B since 2002. Approximately 81% of the company’s real estate portfolio is certified to a green building standard. Climate Change RBC became carbon neutral in 2017 and has committed to achieving net-zero carbon emissions in its global operations. The bank significantly reduced greenhouse gas (GHG) emissions in 2019, and plans a further 15% reduction by F2023. During F2019, RBC sourced around 77% of its electricity from renewable or non-emitting sources, and plans to increase this to 90% by 2023. RBC is also actively investing in AI (e.g., Energy AI, AI for Climate Change project) to address climate and environmental changes. In 2019, MFC took proactive steps such as identifying climate-related risk across businesses, adding oversight of the ESG framework to the Board mandate, and establishing a Climate Change Working Group led by the Chief Risk Officer. MFC is a founding member of the Climate Action 100+ (five-year initiative launched in 2017 that encourages reduction of GHG emissions). This initiative is now supported by more than 450 asset managers from around the globe, managing >$40T in assets. Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. 22 July 2020 6