Sustainable Investing Q&A
Thomas George started up and manages the TD Global Sustainability Fund, the first mutual fund of its kind for Canada’s second largest bank, TD Canada Trust. He spoke to Kiva Bottero about his approach to sustainable investing and the future growth potential of this form of investing.
Can we really change the environment through our investment approach?
Yes, absolutely. And here’s where I’d argue that being less glamorous is the most impactful way. Investing in companies that are ahead of their peers in terms of embracing the elements of sustainability. So in managing the TD Global Sustainability Fund there are large cap companies like McDonalds and Proctor and Gamble. That’s about 70% of the portfolio. Then 30% are what I’d consider green investing or clean technology. Sustainable investing moves the dial because when providing capital to companies, large companies particularly, that are themselves moving the dial, it’s like a dinosaur moving through the forest—it will change the landscape. So from my perspective you can have a profound impact by choosing one company in a boring old industry versus another company.
Let me give you an example that will highlight the point—Coca Cola. A big boring company that most very green-minded people would say no way in hell I’ll ever be there. But I’d say arguably Coca Cola would do more for bioplastics than any other company in the world. Currently they’ve got this Coke bioplastics bottle that they’re incorporating 20% bioplastics into, and they’re going to go to full bioplastics in five years for all plastics. To me that’s profound. OK, the stuff rots your teeth so it may not appeal to the healthy living crowd.
Since I’ve started looking at sustainable investing I don’t want to say I’ve become more pragmatic and less idealistic. I still have those beautiful visions of what the world could be, but I’m very cognizant of the size of the levers. And what being in this industry for long enough has told me is that sometimes the biggest opportunities are in some of the companies that we don’t want to engage with. But engaging and pushing those guys forward is a big thing.
The Coca Cola example is a good one. Do you see a lot of resistance from investors wondering why you’re supporting large multinationals that push their externalities onto the environment?
I totally agree. If you look at our fund’s top ten list, you will find every multinational on Earth—Apple, Nestle, McDonalds, Nike. We get calls from investors saying “why aren’t there clean tech companies up there.” Part of this comes down to my own portfolio positioning. So we still have the same overall weight in clean technology, but we’re taking much smaller positions just to reduce the risk.
But the main question is, “why do we need this?” And I say, you’re right, I get the whole pushback on multinationals. But first of all, I’ll tell them about their money. What I find is a dichotomy—most green investors are actually very conservative people who like to maximize their resources, including their money. You don’t find a lot of eco-conscious people freewheeling at the casino. Most green investors aren’t gamblers. But that all being said, technology is a very high risk area that I would equate much closer to the casino than to stability. So what I’m really trying to explain to them is that balance is not found with a pure clean tech portfolio unless you’re very wealthy, then maybe yes. But if you’re a middle-class person you need some sort of stability and large blue chip companies offer that.
And the next level I really get down to explaining to them is that I could fill the fund with the best cleantech ideas as possible, but I’m running a public fund that needs to provide liquidity. If I was given a mandate to run money for five years, then I could afford to invest in much riskier assets than what we’re offering.
In terms of environmental levers. When you go through those levers none of these companies are 100 percent a good company, but I would even argue that the best way to have an impact is almost by owning a sustainability fund or something of that sort with no clean tech, no consumer discretionary names. Own only the most resource intensive sectors and companies. Own the best in class when it comes to sustainability with regards to mining, energy, utilities. That’s going to have a larger impact than anything else.
To the investor wanting to do something good with their money, but still make money, what challenges do they face?
The challenges they face are not even green, not sustainable versus non–sustainable funds. The challenges they face are broad global economic challenges. We have a lot of issues in the global economy and whether those get worked out will determine whether being in equities makes complete sense or whether you should just be in fixed income or bonds. It ‘s going to be a time of volatility, but I think if you’ve got a long enough time horizon—call it ten years—I think we’re in an interesting time. But I won’t say we’re out of the woods just yet.
What companies would you recommend to investors?
The one I like, now they still do externalize some costs because they’ve got a manufacturing footprint, is Piaggio, the Italian manufacturer of scooters, most notably Vespa. In my view, I hope we’re beyond the world where sexy is a big fat Hummer going down the street. Vespa has done more for efficiency in terms of brand recognition than a lot of companies in the world. Specifically they’re growing leaps and bounds in Asia, specifically India. Once you define luxury you can have quality in something that’s efficient and that’s fantastic.
What does the short-term future look like for sustainable investors?
The short-term future is going to be filled with volatility. No doubt. It’s going to be one where there’s lot of uncertainty not driven by the sustainability of their fund per se, but by macroeconomic factors. That all being said, macroeconomic factors matter a lot because every step down we go into a deeper recession I can guarantee you cleantech is going to fall two times that of a normal stock. And that’s something very important to bear. So in the near term, if volatility is high and its got a downside trajectory, that’s not going to mean good things for some very specific clean technology stocks. The more uneconomical you are, the worse it is.
As the environmental situation worsens, do you see governments taking a more progressive approach or do you see economics continuing to control the political agenda?
The fact that we still haven’t found the political will today—post-Fukushima, post-Gulf of Mexico, I would say is disheartening. That all being said, where I am really, really encouraged is from a healthy living perspective. The growth in organics has just been remarkable. Over the long term that growth will drive political decisions.
It’s at a point right now where—aside from growing their base in emerging markets—the only growth big companies like Kraft and Nestle are seeing in their portfolio is from natural type products. Things are getting less protest, not more. Coca Cola is not growing because people are just dying to get a can of Coke. Coca Cola is growing because they are trying to find other avenues. They’re trying to find what’s the new thing. They’re trying to be cool. Coke is just not cool anymore.
And what do you see the long-term future looking like for someone wanting to invest sustainably?
I’m actually really quite optimistic over the long term because of the economic-environmental convergence—the fact that the more environmentally friendly a company is, the better economic prospects they have. As long as those things stand, it’s going to be a fairly good future. And then you have the whole healthy living thing going on in the background.
In addition to that, you’ve got big companies and pension funds moving very quickly towards sustainable investing mandates, which is going to create a weight of money thing. It’s almost like if you’re eating your granola and oats and the world’s not really changing and then Nestle comes along and says “hey, we’re kind of in the organics business.” You’re like “whoa, where did that come from. Now I can get my rolled oats everywhere.” Right now, it may be small, but at some point it gets really big.
Do you see this form of investing becoming dominant in the future? Are people ready for it?
I don’t think it even becomes dominant, I think it becomes the form of investing in the future. In about 20 years, the key investments are going to be based on renewables. If you can get to a point where new technologies are enabling renewable forms of energy and the fact that we’re not consuming something and we can always reuse, that to me is a Jetson-type formula.
Look at pulp and paper. Who invests in paper anymore, not me. Pulp and paper has gone from a huge part of indices and now it’s a dead sector. Technology just continues to kill off sectors. Fast forwarding 20 years, of the companies that have been able to operate the most efficiently, a lot will still be around so then effectively the whole sector will be left with these really efficient companies, which I would view as a sustainable sector.
Pulp and a paper is a really good example. I use my Kindle and have no attachment to paper anymore.
You brought up a good point with your Kindle and the iPad. Now this is where I really ask sustainable investors to challenge themselves. In a lot of ways the world we see that has less of an environmental footprint does have lots of footprints somewhere. I’m spending a lot of my time in the rare earths and metals and some people would say “why?” The more environmentally-friendly world that we perceive is very metals intensive, which has a lot of impacts environmentally. A lot of our solutions are batteries. We’re definitely preserving a lot, but at the same time we’re buying new metals to replace what we preserve. But some good things are happening to enable increased recycling and more sustainable mining.
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