Interest in sustainable investing is at an all-time high. And as governments take steps to address climate change, opportunities are being created for investors. Kim Parlee speaks with Damian Fernandes, Portfolio Manager, TD Asset Management, about the emerging trends he is seeing in the ESG investing landscape.
Look Kim, in the opening remarks you were talking about this, right? The only thing that's getting past the U.S. in a bipartisan agreement was the infrastructure bill. COP26, the long term commitments to carbon reduction. There's a sea change afoot taking place. We see so much interest, and even from our own clients. Thinking about sustainable solutions, I'll just give you a data point to talk about just the magnitude. Since the end of 2019, so 2020 to today, 40 cents of every dollar has gone into ESG investing. I think the demand from clients to actually find these sustainable solutions and the commitment from policymakers, whether it's governments or just the U.N., for example in COP26, there's this this universal agreement that we have to do something. And I think that's creating really, really interesting investment opportunities.
That 40 cents number is astounding, actually, when you put it that way. Tell me, I know from previous discussions when people think about sustainable investing, there's some simple ways of doing, but I know that you have a much more comprehensive approach. What is it?
The way we think about this is, let's invest in companies for our clients. They want to invest alongside their values. And whether their values are about reducing poverty, helping with climate or social justice issues. So let's think about ways we can find companies whose revenues are tied to these value systems. For us, we use what we call the UN Sustainable Development Goals. I would encourage people to look them up. It's basically the platform that the UN has laid out for the next few decades on improving the human condition. So when we think about sustainable investing, we say, let's find companies where we can actually tie these revenue streams to helping improve these broader outcomes, like zero hunger or improved electrification, or reduced inequalities. And that's how we think about sustainability, building products that help, where I can find these companies whose revenues I can directly tie to these sustainable goals.
You've got three names that you brought in for us to take a look at in that framework. The first one is Eaton, this is ETN. What is this company?
Yeah, just maybe on those three names, a step back. What I want to think about when people think about sustainable investing, particularly how we're thinking about it, is adopt a pick-and-shovel approach. What I mean by pick-and-shovels is the suppliers who are going to win no matter what. And so when you think about Eaton, Eaton is an electrical infrastructure company. We know electrification is the future. But think about something as simple as the need for increased charging capacity for electrical vehicles. Eaton actually helps facilitate that. So if you're in the downtown core and you're working one of those office buildings, you'll need more charging stations for your electric vehicles. Eaton will actually help, will work with the facilities in helping build those things. So when you talk about, for example, in the infrastructure plan, 7.5 billion was what was dedicated towards building a national EV, electric vehicle, charging platform, Eaton directly benefits. So this is what I think about, winning regardless. Playing the secular theme, not trying to pick which company is going to win, picking the company that participates in this whole energy transition. For us, a clear winner in that is Eaton and what we should see is increased revenues and for Eaton going towards helping the world electrify, North America electrify its systems, both with power systems and with vehicles.
So it's a great example, picks and shovels and your next one is tractors. I guess that falls in that category, John Deere.
More directly. Actually coincidentally, John Deere reported today and the stock was up 5%. We think there's a big runway ahead for this company too, because not only is the core business doing really well. For example, John Deere today, on their call, they said the amount of demand for their main products, the whole industry-wide demand, will not be satisfied even going into 2022. So John Deere and its competitors, there's so much demand for the stuff that there's not enough sufficient supply. So it has pricing power. But then you think about how does John Deere help with sustainability? Think about a combine tractor. The big machines that help collect, sort the crops. These tractors right now actually are digitized. They have machine-learning technology to track what's going into the tractor to make sure it's picking up the right things. They actually have geolocation so that they go in the straight line to reduce the amount of waste and make sure the land is only being touched once. These are massive improvements. When you think about farming equipment, if done efficiently, it reduces waste and reduces how much fuel they're using. It improves the actual efficiency of the crop. And so John Deere, this is its growth platform. It's going to work with helping farmers improve crop yields. And when I think about a sustainable goal like zero hunger, here we have a company that's directly doing that. So that's how we're thinking about these longer term goals.
I only got about 30 seconds, Damian. It's not fair to ask you this, but I know you've got another one here, S&P Global, SPGI, which I'm assuming is like data and the ratings of companies. But I also want to squeeze in here, what could derail all this? I understand why they're compelling, but what could what's the bear thesis maybe for these?
The bear thesis is just the amount of excitement in this. It's pulling so much demand in. And so a lot of these companies, what you're seeing is that they're trading at like pretty high valuation multiples at the current level, and not unlike the companies I just listed, we feel very comfortable at the long term profitability cash flow. But what could derail it is similar to the internet bubble. There's just so much money coming in chasing this that sometimes you have these suboptimal business models that people might have invested in. And then if they fail, the whole industry gets hit with this negative connotation, like the whole industry moved up too fast. So but I'm not worried too much about the longer term risk. I think the companies, if you're intelligent and thinking about cash flow growth and actually tie it to these sustainable goals, I think you can find great companies to participate in this growing trend for sustainable investing.
Damian, always a pleasure to have you on. Thanks so much for joining us.
Always a pleasure. Thanks, Kim.