TD Asset Management Inc. (TDAM) became a signatory to the Principles for Responsible Investment (PRI), a global organization set up by the UN and the world's largest institutional investors, ¹ in 2008 and was among one of the first Canadian bank-owned asset managers to do so. ²

In 2020, TDAM launched the TD North American Sustainability Equity Fund ³ (the Fund) to offer a strategy that is aligned with a socially responsible approach to investing and to delivering long-term capital appreciation to a broad investor base by primarily investing in North American equity securities.

In this article, we want to reflect on the journey, the lessons learned and how our experience has reshaped our thinking and investment process as it relates to sustainable investing.

When defining the investment strategy for the TD North American Sustainability Equity Fund, we shifted away from traditional Environmental, Social and Governance (ESG) investing approaches that applied negative screening to one of positive screening. We focused instead on alignment with a clearly-defined, holistic, and forward-looking framework – the UN's Sustainable Development Goals (SDGs). The SDGs were adopted in 2015 by UN member states as a shared global framework to address the world's most pressing challenges. ⁴

The 17 interconnected goals cover a broad range of issues, and by investing in companies that are SDG-aligned, the TD North American Sustainability Equity Fund aims to achieve long-term capital appreciation while contributing to SDG-aligned outcomes for society (learn more here). We believe that SDGs are relevant for investors because they act as a signpost for economic activities and public policy, which may assist with driving opportunities and risks. The new framework enabled the following shifts:

• Positive screening: We proactively seek out business models with real-world impacts, guided by the SDGs.
• Linking fundamentals: We believe that sustainability must be tied to sound financial performance, such as profitably generating and growing free cash flow and efficiently allocating capital. Without fundamentals, returns are not sustainable.
• Third-party ESG ratings: Ongoing monitoring of the Fund’s alignment with its objectives is also achieved through the use of a third-party ESG rating. While the rating is not relied on for security selection, it is reviewed quarterly to ensure the Fund’s ESG rating is better than the ESG rating of its benchmark. ⁵ Third-party ESG ratings are also leveraged to assist with capturing potential controversies and misalignment with the SDGs.

The investment process of the TD North American Sustainability Equity Fund is rooted in bottom-up stock selection. It starts with identifying high quality compounders – industry leaders with a sustainable competitive advantage, as evidenced by high returns on capital, strong balance sheets and management teams with a track record of allocating capital efficiently.

From there, we positively screen for "sustainable leaders", which are defined as companies that make positive contributions towards the SDGs, either through their products and services or through operational practices.

• Product/service alignment assesses a company's revenue from products and services addressing relevant SDGs, based on their reported revenue.
• Operational alignment evaluates whether the company's operations may result in a positive or negative impact in addressing specific SDGs. We take into consideration a company's internal policies, disclosure of ESG metrics and corporate practices, as well as assessments by third-party data providers.

The TDAM Fundamental Equity Team Research Analysts assess companies’ SDG alignment by incorporating broad data sources, including companies’ sustainability reports, industry data and third-party ESG data. Not all companies clearly disclose or measure their impacts, and third-party research is limited in scope. To improve SDG impact measurements and reporting, where possible, we ask companies to quantify and report on their impacts related to the SDGs. We also engage brokers and ESG data providers by asking for further development and expansion in SDG-linked data.

In 2025, the TD North American Sustainability Equity Fund initiated a position in a fitness brand. This brand offers two types of memberships: White Cards (home location access) and Black Cards (additional amenities and all location access). We believe this fitness brand is a market leader when it comes to delivering value for customers and this belief is based on three primary drivers:

1. Positive secular growth and long runway ahead – While gym membership in the U.S. has been growing at a 3% compound annual growth rate since 2011, that growth rate has consistently doubled since 2021.⁶ In addition, only one-fourth of the U.S. addressable population belongs to a gym today, providing a healthy runway for potential membership penetration growth. ⁷
2. Durable business model – This fitness brand has a defensive business model with its franchise strategy and best-in-class unit economics. It has a compelling value proposition in terms of pricing and consumer economics when compared to peers (Figure 1). Moreover, the company has a recent track record of healthy organic growth driving market share gains, a trend that has accelerated post-Covid (Figure 2).
3. Favourable risk-reward setup – The new and energized management team, combined with the strategic changes to membership pricing and franchisee incentives, positions the stock for strong performance if business momentum exceeds expectations.

Figure 1: Fitness brand delivers the most compelling value among peers

Source: Company reports, Health and Fitness Association, Canaccord Genuity. As of December 2024.

The investment experiences of the past have underscored the importance of bottom-up, fundamental analysis in identifying investment opportunities for the Fund. Now, five years into managing the Fund, several key lessons have emerged.

• Diversification remains critical – With our approach, we mitigate the concentration risk inherent in thematic or sector-specific ESG strategies, but we find novel means to gain exposure to specific themes when needed. For instance, despite energy accounting for about 6% of the benchmark, ⁸ we look for creative means to replicate energy exposure in a sustainable manner - for example, by investing in companies involved in bio-fuels. This allows us to manage both diversification and relative performance risks.
• The foundation is quality – High-quality compounders - identified as companies with strong balance sheets, durable growth and proven management – are the foundation of long-term capital appreciation. This is even more relevant for sustainable investing as sustainability increases complexity, compliance, capital requirements and reputation risk, making quality an important characteristic for long-term performance.
• Constraints bring clarity – Our focused sustainability framework is not a limitation; it is an advantage. It selects businesses that we believe will deliver both risk-adjusted returns and positive sustainability outcomes.
• Durability – Recognizing the industry-wide concerns around greenwashing and an evolving global regulatory environment, our strategy is designed to lean on a stable framework, link sustainability with fundamentals, tilt towards thematic tailwinds and maintain sector diversification, while remaining transparent about our process. All of these are important pieces for helping to deliver resilient performance.

The TD North American Sustainability Equity Fund is a strategic solution focused on achieving long-term capital appreciation, where each portfolio holding company is positively contributing towards the SDGs. Our process, which is rooted in fundamentals and guided by the SDG framework, is aimed towards helping the Fund achieve its objectives over its initial five-years and beyond.