Joe Coletti
Welcome to Powering Sustainable Ideas, a podcast series from RBC Capital Markets where we interview the leaders and companies powering the sustainable future. I'm your host for this episode, Joe Coletti. Today we're broadcasting from RBC’s Global Energy, Power and Infrastructure Conference In New York, and I'm joined by Sarah Mahaffy, Head of Global Sustainability Strategy Research at RBC Capital Markets. In our discussion, we're going to talk to Sarah about her latest Sustainability Strategy Sector Snapshot for energy and utilities, which was just published recently. From fund flow trends to proxies and surprises, the snapshot pinpoints exactly where investor sentiment is turning around the energy transition debate. Sarah, welcome to the podcast.
Sara Mahaffy
Yeah, thanks for having me on. Really appreciate it.
Joe Coletti
So your latest snapshot opens with the big picture. Flows into sustainable equity funds have seesawed this year, yet capital keeps gravitating toward dedicated climate transition vehicles. Can you talk about what's underpinning that resilience when the broader ESG label is under such scrutiny right now?
Sara Mahaffy
Yeah, so as you mentioned, it's been a tough year for sustainable equity fund flows generally. For the broader landscape, we've seen outflows return this year. That's been amid political headwinds, increased regulations and performance pressures, as well as the anti-ESG assignment that we've seen particularly felt within the US. And within the landscape where the flows have been most challenged have just been the areas with the toughest performance track record. So the clean tech funds, impact funds, things like that. For the climate transition equity funds, and we would define those funds as ones that can own the companies providing solutions to climate mitigation but also names that are reorienting their business models towards a lower carbon economy. For these funds, I think why the flows have held up a little bit better, it's they tend to be a bit more diversified from a sector perspective so that's helped support the fund flows. Another thing that we were noticing last year is that we were seeing some rotation out of ESG funds and into climate transition funds. So perhaps, this is reflecting certain asset owners taking a more targeted, thematic approach with their sustainable investing allocations and the climate transition funds benefiting on the back of that.
Another point that's been interesting to me in our work is that while we've seen all these challenges for the sustainable equity funds broadly, the picture has looked a little bit different in other asset classes. So when we look at sustainable fixed income funds, they've actually generally seen pretty persistent inflows in recent months, including this year, and their share of total fixed income fund AUM has continue to hit new highs this year. So, a much different backdrop on the fixed income side compared to what we're seeing on the equity side.
Joe Coletti
That's really interesting on the fixed income side. You know, another data point that may surprise some people, sustainable funds are easing long standing exclusions on nuclear power. What signals should utilities and reactor developers take from that policy and capital pivot that's going on?
Sara Mahaffy
This is something that we've been monitoring the last few years in terms of the shifting and exclusion policies. We've seen this really evolve, as we're seeing rising policy support and public support for nuclear power to meet the dual goals of energy security and net zero, as well as all the recent excitement around AI's role in meeting the growing power demand needs from AI and its role as base load power.
In terms of the exclusions being lifted, we really first saw this take place for North American sustainable funds, particularly given the backdrop of bipartisan support for nuclear power in the US, it's really one of the few areas of the energy transition where you see that broader bipartisan support. And under the new administration, we've seen some of that support kind of continue to be reflected. For example, the series of new executive orders released by the Trump administration last month with the goal of quadrupling nuclear power energy capacity by 2050. But what's been interesting to me in our work more recently has been the loosening of exclusions in Europe, where now European sustainable funds are also dropping exclusions towards nuclear power. I think one thing that we're keeping in mind in our work is that while we're seeing these exclusions being lifted rising sustainable fund ownership towards, nuclear power, most of the names still remain fairly lowly owned within sustainable funds, at least. So, thinking of the of the fund flows dynamics, and what inning we're in, there's still room for ownership levels to rise among the sustainable funds. So that's kind of one thing we're keeping in mind.
Joe Coletti
So you mentioned Europe, which is another thing I want to pick up on. So at the same time all this is happening that you're talking about several European traditional funds are trimming blanket fossil fuel bans in the name of energy security. Do you think that hints at a broader move from divestment towards, quote, unquote transition investing?
Sara Mahaffy
Yeah, I think it could be reflecting that. I think that's definitely part of the debate. And, yeah, and just to provide a little bit more color on what we've been seeing in our work tracking the shifting exclusions policies. Another issue that we've been watching as it relates to the growing focus on energy security, affordability, has been exclusions around fossil fuels, and if we're seeing signs of easing there. And, just generally, in North America, it's extremely rare to see strict exclusions being employed, outside of dedicated sustainable fund products. In Europe, it's a much different case. We've really seen the use of exclusions broadly ramp up the last few years following the introduction of new sustainable investing regulations in Europe, which required a lot more transparency in terms of the sustainable investing practices funds are employing, things like that. So we find that more than half of European conventional funds are employing baseline exclusions, which can include fossil fuels in some cases. We're seeing some of that pullback, which I think is really tied to the energy security debates. But also, to your earlier point, I think around the debate around engagement versus divestment, which always comes up in sustainable investing, that may be picking up in Europe as well.
Joe Coletti
So early 2025 proxy data show fewer environmental resolutions but stronger support for governance items like eliminating super majority voting, for example. What does that shift tell us about where investor stewardship may be headed next?
Sara Mahaffy
Yeah, so we're definitely seeing a return in focus to some of the more traditional corporate governance issues. You know, as you mentioned, this year during proxy season, it's the first year since 2021 where corporate governance related shareholder proposals are outnumbering those proposals focused on environmental and social issues. And it's issues like shareholder rights, executive compensation that are really rising in focus. It's not a huge surprise to me to see that given the shifting political backdrop and the slipping support that we've seen for environmental and social proposals in recent years. Governance topics just tend to be less controversial, and the support levels for these proposals have been near record highs in recent years.
That's not to say that we're not seeing any environmental and social proposals receive high support. This year, we've seen a number, you know, focused on political lobbying activities, particularly with the new administration coming in, quite a bit of support there. We've also noticed some focused on transition finance receive high support this year. It's become much more company specific. In terms of the support levels that these proposals will garner. Really depends on the materiality, the prescriptiveness of the proposal, and also just the company's policies and disclosures.
Joe Coletti
So I want to round out our conversation today by digging in a little bit to your thematic scorecard among energy transition themes, and one of them that's in there is grid resilience, which I believe is at the top of the rankings despite rich valuations. Which fundamentals justify that premium, and what earnings or policy shocks do you think could overturn that view?
Sara Mahaffy
Yeah, so in our research, we've built out a thematic scorecard where we rank major sustainable investing themes, on a top down quantitative basis, looking at things like valuation, earnings, quality, sentiment, policy and macro factors, and where we see the most opportunities across this range of indicators. The grid resilience theme, it ranks pretty high in our scorecard, and particularly among the energy transition related themes. This basket of names is going to include a lot of different types of stocks, names that are really supporting great infrastructure, whether that's transmission, distribution, smart grid technologies, power storage, things like that. What we have really liked about the theme is the strong earnings and quality profile that we see. So the theme has one of the best earnings revisions, momentum profile among the themes that we're tracking. Long term growth expectations are continuing to trend higher. There's a lot of really interesting longer term drivers of the theme, whether that's, aging infrastructure, grid resilience and hardening, due to the rising number of extreme weather events that we're seeing increased renewable energy integration, as well as electrification and load growth due to data centers, EV adoption, things like that. Additionally, the higher quality profile of the theme has made it a little bit more resilient to the higher interest rate inflation backdrop that we've seen the last couple of years, particularly compared to some of the other energy transition areas like renewable energy and green transportation.
As you've mentioned, the valuation profile does look elevated on our models. That's kind of the main red flag that we see in our scorecard for the theme. So that means that it's going to be more vulnerable to noise around things like AI and data center energy demand. We saw that earlier this year following the deep seek announcement. But again, I think that the strong earnings revisions, quality profile and longer term opportunities for the theme do help to support the premium that we're seeing.
From a policy perspective, there's puts and takes. On the one hand, the administration's focus on energy AI dominance and the potential for permitting reform would help to support the theme. On the other hand, tariffs and fluctuations in trade policy do pose a risk for a number of names in the basket, but again, overall we see one of the better opportunities for this theme within our thematic scorecard.
Joe Coletti
So we've only just scratched the surface on the content in this report in our discussion today. So I encourage our listeners to check out her Sector Snapshot for energy and utilities, but also all of her research in global sustainability strategy.
Joe Coletti
So Sarah, thank you so much for being with us, and we hope to have you back on the podcast again soon.
Sara Mahaffy
Yeah, thanks again for having me on.
Joe Coletti
That's it for our conversation today. Thanks again for listening to powering sustainable ideas. Brought to you by RBC Capital Markets. This episode was recorded on June 4, 2025. Please remember to subscribe to get more great content and be alerted about future episodes. See you all next time.
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This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.