TD Asset Management (“TDAM”) launches two new mutual funds that support companies demonstrating positive contributions that drive change. Kim Parlee speaks with Rob Vanderhooft, CIO, TDAM and Damian Fernandes, Portfolio Manager, TDAM, about the growing demand for ESG investing.
- The coronavirus pandemic has wreaked health and economic havoc right around the world. But it's also shone an important spotlight on things like climate change, income inequality, and diversity. But take a look at this chart. As you can see, mutual funds and ETFs that emphasize good environmental, social, and governance have surged in popularity. Investors are seeking returns but also good corporate citizens.
Rob Vanderhooft is the Chief Investment Officer at TD Asset Management, and Damian Fernandes is a Portfolio Manager at TD Asset Management, here to talk more about ESG. And Rob, let's just start with just a primer, if you would, on what exactly is ESG?
- Well, as you talked about, environment, social, and governance are the key components of that. And for us, really, it's a key component of sustainability. And what we tend to look for, and really all of what we do at TDAM, are sustainable long-term investments. And within that, obviously, we look at companies of whether their ESG factors are sustainable in the longer term, and whether they can perform and ultimately beat indices and their peers.
- And let me just dig a little more into that. We've got Damian, as I mentioned, here as well. Damian, take us through a bit more of just the E and the S and the G. We have a chart here that talks about these factors that you're looking at.
Sure, Kim. As Rob mentioned, it's really for us at TD Asset Management, it's about identifying sustainable returns. And sometimes it actually pays to look deeper than the financial statements. For example, if you're looking at an oil and gas company, sure you can look at the reserves on the balance sheet, or you could look at how much cash flow is generated. But it's also important to look at what its greenhouse gas emissions versus its peers, or how is the management team being compensated, which is a governance factor. So those are both ESG factors, environmental factors or governance factors or a social factor about employees. What's employee turnover?
So first, when we're looking at either, as Rob mentioned, at identifying and investing for sustainable long-term returns, we're really looking at the quantum of more than just financial statement data. We're looking at other factors that give us insight into whether this will be a good company to invest in.
- Rob, I know that you and I spoke earlier. And when you're looking at these types of things-- just to be clear, I mean TD Asset Management, I know, has been a signatory on many types of ESG initiatives, and one of the first around the world for years. But also, when it comes to investing, there's different ways of doing it either through not getting involved with companies because of how they operate or getting involved because you want to change how they operate. So maybe tell us a bit about those.
- Yeah, at TD Asset Management, we tend to favor engagement, which means taking our ownership responsibilities and having an influence, a voice in how companies operate, and influencing them and being able to influence them on the ESG factors. And we think that we are able to do that. We also offer exclusionary product where we possibly screen the product. And Damian can talk a bit about that. But we know through engagement we can have a positive impact.
CCGG, for example, the Canadian Coalition for Good Governance-- we've been members of that for many years. And through those engagements, we know we've moved the needle with respect to governance in Canada. And we feel that through that engagement, we can have a similar impact on the E and S factors as well. And so to be a positive influence for change, for sustainability, that really is our core interest [AUDIO OUT] in that these ESG factors that therefore generate a lower cost of capital, a greater ability to grow, et cetera. And that benefit accrues to our clients.
You know, I showed a chart earlier, Damian, that does talk about the explosion in growth. Why specifically do you think that's happening right now?
So I think, Kim, it's a sign of our times. First of all, what we're finding is that companies that score really well in these ESG factors have actually outperformed in this full market. So hence, when Rob was talking about engagement and walking with corporates to improve their ESG credentials, as an asset manager, that's a really attractive place to be because we can participate if these companies have seen a rerating.
The second thing I think is just-- why I say it's a sign of our times is also because we're in the midst of environmental concerns-- Larry Fink's letter to the CEOs for all these corporations to identify climate risk. We're in the midst of a pandemic that has really about social unrest issues. Identifying companies that-- how they interact with their employees or the societies they operate in, these are important things. And I think that's what's seeing the separation. I think that's what you're seeing from investors, is that they actually are looking for-- outside of just financial returns, they're actually looking to invest alongside companies that are actually on the right side of change.
- Damian, I want to start with you and talk a bit about just some of the new products that are getting launched right now. You've got a couple that you're launching.
- Yes, so we're launching two funds-- North American Sustainability Equity fund and a North American Sustainability Balance fund. And then basically, underlying the premise of both these funds, Kim, is identifying companies and investing in companies that are on the right side of change.
We have different ways to do that. But basically, the idea is that the group of companies that can actually have some credibility and contribute to social good are finite. And yet, as you pointed out earlier, the amount of assets, the amount of interest keeps growing. So we can actually-- because there's a fixed supply and increasing demand, our expectation is that these companies will continue to see a beneficial tailwind, a rerating of sorts. So we launched these products in an effort to allow our clients access to these sustainability-themed investments.
Can you tell me a bit more about the first one, Sustainable Leaders Equity fund? What's some of the criteria or some of the names that are in there that people would know and why they're there?
- Sure. So just let's think back to a few years ago. And Rob highlighted this in our earlier segment about talking about the rise of ESG investing. But what we are really seeing are that companies that have strong ESG credentials, they're actually enjoying a rerating. They're actually outperforming their peer set.
And so for a company like NextEra, which is a utility company in Florida which is the largest renewable sourced-- a lot of its power generation comes from renewable sources. It's meaningfully outperformed its utility peer groups and other utilities that derive energy from more traditional sources, like coal.
So whether we use-- and we're seeing this across industries. It could be, for example, in a materials company. A name like Ecolab, which uses sustainable solutions to break down waste, we're seeing those companies, actually, their stock prices, their multiples-- the marketplace is rewarding them with higher multiples.
And I think it's to this idea that the number of companies that can claim credibility in this is fixed. So they're actually enjoying these positive tailwinds. And so that's just a few examples across industries. And to be clear, it's not just utilities or industrials. It's across industries that the good actors, the companies with good ESG ratings, are seeing better performance.
I'll talk about the second fund in a second. But, Rob, just given the demand that is coming in from people, do you see there could be some more ESG or more sustainable type offerings coming later this year?
- Yeah, there will be, for sure. I mean again, all of our product is ESG. We do engage across all classes for all of our product. Damian has talked about a couple of the positive risk rating products that we offer. And we'll continue to offer additional products.
So you'll see later in the year that we'll see additional products. We're quite large in the passive space, so don't be surprised if you see some products that are based on more passive products. And so that's sort of our direction, but yeah, there definitely will be more products.
I think one of the big, I'd say, concerns-- and probably something that's always held, I'd say, this type of investment back-- has been that the perception, whether it's true or not, that you can't generate the same ROI in a an ESG non-compliant versus compliant company. So I don't know. Damian, any thoughts on that? Is that changing just because of the nature of everything you're talking about is changing, the demand for these types of companies?
- You know what, I don't believe that because the cornerstone of our philosophy-- we said it at the start, Rob mentioned it, is sustainable investments. And whether it's positively screened product, like the funds we're just launching, that are investing in these companies on the right side of change, or whether it's across all of TD Asset Management strategies where we engage with corporates to help improve their ESG credentials, we should be able-- and we've already seen evidence of it-- to generate sustainable returns that achieve client goals.
So I don't believe that at all. I think we, TD Asset Management, is actually a leader in this space. And what we are going to do and what we have in the pipeline will continue to advance our ESG offerings. And I think that will generate returns that I hope our clients are pretty happy with.
- Rob, I see you nodding there.
- Yeah, no. Absolutely. Damian's talked about a couple of funds that we're launching this week. But we've got a long history of managing those types of funds. And what we've seen is, in terms of those ESG factors, the companies that are on the right side of that have tended to do very well in the long-term. And so again, very consistent with that sustainable long-term growth. And so we don't see any penalty, per se, for-- and in fact, we also see a reduction of risk as a result.
- When you talk about that, can you tell me a bit more about the reduction of risk?
- Yeah, I mean in terms of companies that we look at ESG, as well, from a risk lens, in terms of where they might be vulnerable to issues. And whether it's public perception or environmental concerns that would come up, really along that line is the how are they managing their exposure to these factors? And what is the risk as a result?
- I mean, the risk conversation has changed, I'd say, quite a bit over the past few years and probably accelerated in the past few months just in terms of how things are kind of playing out. Damian, I did want to ask you as well-- we talked about one fund. The other one, the North American Sustainable Leaders Balanced fund, which I believe has some green bonds as well, maybe just talk a bit about that one for us.
- Well, that's really interesting, Kim. As I mentioned, the equity version, the North American Sustainable Leaders Equity fund, is Investing in the public equities, the stocks of these sustainable companies. The balanced version is Tactical Asset Allocation fund, where on the fixed income component, our fixed income team will actually be investing in the corporate bonds or green bonds of these good corporate citizens. And what we're seeing is that it's a really interesting space to be.
For example, green bonds-- the green bonds issued by corporates are actually trading at a lower yield, as in a higher price, than their regular corporate bonds. So actually, being in this space, because of this idea about demand, providing a product to allow our clients access to this, I'm really excited about the balanced version because our fixed income team, which is award-winning, has a thorough credit research department behind it, is actually going out there and identifying these fixed income instruments which are also, some of the equity instruments, are also contributing to social good.
On that we will leave it. Gentlemen, thank you so much for joining us, Rob Vanderhooft, Chief Investment Officer at TD Asset Management, and Damian Fernandes, Portfolio Manager at TD Asset Management.