TD says bets on environment should beat market

Thomas George, co-manager of the TD Global Sustainability Fund, appears in this undated handout photo.

TORONTO (Reuters) - Canadian fund manager Thomas George says environmentally responsible companies should beat the broader market, given growing renewable energy demand and tighter regulations, particularly after the catastrophic oil spill in the Gulf of Mexico.

But the co-manager of the TD Global Sustainability Fund knows from experience that investors may need patience.

His fund, launched in 2007, is down almost 13 percent since inception, which he says is partly due to the lower industrial production and weaker energy demand that resulted from the financial crisis and resulting recession.

However, George says having a multi-cap approach that includes multinationals such as Procter & Gamble Co, General Electric and Nike Inc, as well as smaller environmental technology firms such as Flowserve Corp and Itron Inc, will see investors gain in the long run.

"What we're trying to do is create a portfolio of companies that are doing more with less. Ultimately that's good for the environment and that should be good for profitability," George told Reuters.

"If this was a pure environmental technology fund by definition you would need to invest in a large amount of technologies that are unprofitable today. We feel as long as you're investing in companies that are making money today you're limiting your downside."

George's employer, TD Asset Management, is a unit of Canada's Toronto-Dominion Bank. The C$11 million ($10.6 million) fund had annualized returns of almost 6 percent over the last 12 months, but underperformed its benchmark, the Dow Jones World Composite Sustainability Index, by more than 11 percent.

Two thirds of the stocks are drawn from the benchmark's large-cap names from all sectors -- including traditional mining and oil services companies -- that rank in the top 10 percent of "sustainability" measures such as social and corporate governance.

However, the fund incorporates more than a 30 percent weighting in mid-cap, higher-risk clean technology names which the benchmark does not.

George said using a relative comparison of the S&P Global Clean Energy Index and the benchmark over the same one-year period, the fund outperformed by almost 2 percent.

WIND BETTER BET THAN SOLAR

The 31-year-old money manager, who studied environmental engineering, said the explosion and sinking of a BP Plc oil rig and subsequent massive oil spill in the Gulf of Mexico is an unfortunate reminder that sustainability is a strategic imperative, not just a "nice to have."

"The U.S. is going to likely follow Europe in having forced standards of renewable usage which should underpin the long-term growth for that area and the BP incident is just going to harden the thinking," added Charles Edwardes-Ker, the fund's co-manager.

The managers believe that rapid urbanization in emerging markets will lead to investment in efficiency across all sectors and specifically renewable energy and clean water.

Many of these companies fall under the industrial sector, which the fund is overweight in as well as utilities, a key defensive sector that has significantly lagged the broader global market.

The fund is overweight in U.S. and Canadian-listed companies, but underweight in Europe, excluding the U.K.

"Europe has many many excellent leaders in sustainability and indeed in the pure environmental space but ... we're not as positive on Europe's relative economic and stock market attraction," added Edwardes-Ker.

It also has very limited exposure to solar energy stocks, even though market cap in the environmental space is heavily tilted that way because, George says, solar energy still costs four times the amount as wind energy.

"We feel that that cost curve is coming down dramatically but not fast enough to compete with wind technology."

($1=$1.02 Canadian)

(Reporting by Claire Sibonney, editing by Jeffrey Hodgson)