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From Dan Sanborn, CFA – Partner, Director of Investment Data & Research

The Data Road Less Traveled - What We Have Learned Thus Far

The opportunity to work with severely underutilized and often misunderstood data sets played a significant role in my decision to join Terra Alpha Investments (TAI) back in March 2015. TAI is an advocacy investment firm that seeks to generate better returns, a better environment, and a better world by investing in global, publicly-traded equities. We invest in companies with strong, sustainable business models that are better equipped to deal with the challenges of a changing and increasingly-resource-constrained world. Our Environmental Productivity™ data sets and analysis allow us to identify such companies.

Environmental Productivity™ measures the efficiency with which companies use and impact natural resources. Just as corporate managers measure and analyze labor productivity and capital productivity, Environmental Productivity™ can be used to quantify how productive a company is at using nature. At its core, it is a measure of operational efficiency. Environmental Productivity™ is calculated using company-reported emissions, water, and waste data and is a vital component of multiple stages of TAI’s investment process.

As we have constructed our Environmental Productivity™ data set and spent time researching and analyzing the various components, there are many things we have learned about the data from an investor’s perspective.

First, while estimated data can be helpful in measuring the environmental impact of an investor’s portfolio, it is less relevant for assisting with stock selection. A key premise behind the concept of Environmental Productivity™ is that “if you measure it, you’ll manage it.” Since it is meant to be a gauge of operational efficiency, estimates of a company’s emissions profile, water use, or waste generation from a third-party provider are far less meaningful than reported numbers from the company itself. A company that is measuring and disclosing its impact is more likely to be creating strategies to manage and reduce its impact.

Second, corporate environmental data is not yet ready to be used in a purely passive quantitative investment approach. There are nuances to most (if not all) data sets, and this set of data is no different. In some cases, there are companies that do not report data for all operations. In other cases, differences in business models and manufacturing processes can bias cross-company comparisons. Furthermore, the data doesn’t always translate to management intentionality or a forward-thinking culture. Therefore, it is important to analyze this data with a more active approach in order to better understand the details of the data and to be able to integrate it into traditional fundamental analysis.

Third, we are still only scratching the surface of this data set. For there to be widespread adoption of Environmental Productivity™ analysis within investment processes, the data needs to advance. It needs to advance to the point of almost being able to be used on a passive basis. More companies need to be disclosing the data in a fairly standardized way (progress is being made on this front). Companies need to be measuring and disclosing data on all operations. They need to be setting targets with clear strategies. They need to be integrating this data into their annual reports and demonstrating intentionality in regards to improving efficiency. In other words, more companies need to treat this data as any other material financial data set. Likewise, investors need to do the same. Investors need to demand improvement, provide accountability and incentives, and demonstrate materiality.

Instead, we find ourselves facing several dilemmas. Many companies aren’t spending resources to gather and report on this data because most investors aren’t demanding it, while many investors aren’t demanding the data because most of the data has not been robust enough yet because companies aren’t spending resources on it. Similarly, asset owners tend to not want to invest in funds that use this data and information because there isn’t enough of a track record, while funds that use this data can’t establish a legitimate track record because asset owners are hesitant to invest in them.

In the end, we need more participation across the board. We need more companies recognizing the benefits of adopting sustainable business practices and sharing information on their efforts. We need more investors using this information in their investment processes, rewarding those companies that are mitigating risks and realizing opportunities, and generating higher risk-adjusted returns by investing in such companies. We need more asset owners to help drive this transition by understanding that generating competitive returns while reducing the environmental impact of those investments is an opportunity to put that money to work and make a difference without having to sacrifice return. We need a shift in thinking from the short term (i.e., the next quarter) to the long term (i.e., the next several years). Those that are willing to take the lead and consider thinking about the long term may very well find themselves in a position to generate better returns, a better environment, and a better world.

Dan Sanborn, CFA – Partner, Director of Investment Data & Research

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From Timothy P. Dunn, CFA - Chief Investment Officer, Managing Member, Founder

The story behind Terra Alpha’s Environmental Productivity™ and our journey to create Better Returns, a Better Environment, and a Better World:

Thirty years ago, while I was a very young MBA student, I became fascinated by what made great companies – great. I was drawn to equity investing because it was a profession in which one assessed companies and then invested based on that analysis. In the long-run, the market told you if your analysis about a company was right or wrong. Fortunately, over my investment career my assessments have more often been correct.

During my 27 years as a professional investor, I have learned the power of a deliberate and disciplined investment approach and the importance of a strong, collaborative research team. At Capital Research I was a lead portfolio manager in several of the largest global equity funds with direct responsibility for over $26 billion in client assets. I also oversaw the firm’s global research clusters, which enabled collaboration amongst the firm’s 300 investment professionals.

Unfortunately, over the last 30 years, the public equities markets have become increasingly focused on short-term factors that often have little to do with a company’s long-term reality. And the “markets” increasingly have failed to consider the truly fundamental issues around environmental and societal factors. I walked away from my successful career in professional investing in 2009 because I wanted to try to help correct this market failure.

I spent the subsequent five years working with some of the largest and most important environmental organizations both to learn from them and to help increase the effectiveness of their efforts. My time serving on a state chapter board and working with national leadership at The Nature Conservancy gave me great insights into the power of working positively with companies. My year serving as a Strategic Advisor working directly alongside the leadership team of CDP in London gave me a strong understanding of the growing cache of corporate environmental data and information.

In 2014, I founded Terra Alpha Investments LLC to bring together my deep experience as a professional investor and my strong understanding of the risks (and the opportunities) created by our economy’s impact on essential natural resources that businesses and investors now face. Our firm’s vision is to use the power of our capital markets to help shift how our economy operates so that it is more aligned with our natural systems. To achieve this vision, we invest using our Environmental Productivity™ approach and we actively engage with businesses and other investment professionals.

Today, Terra Alpha has a team of incredibly dedicated professionals working in support of our firm’s mission. We believe that combining well-considered environmental data and research (our Environmental Productivity™ approach) with traditional fundamental analysis will allow us to identify some of the most sustainable companies in the world and provide our investors with superior long-term risk-adjusted returns.

Our capital markets can, and must, properly value our natural resources and the manner by which companies serve the needs of society if we are going to shift to a more sustainable economy. Terra Alpha Investments works through our investment fund and our advocacy work to help make that happen. It connects natural and societal factors to the financial investment process in order to provide our investors with a better way to invest their assets.

We work everyday to deliver better financial returns, a better environment, and a better world.

Timothy P. Dunn, CFA - Chief Investment Officer, Managing Member, Founder

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From Frank Loy - Terra Alpha Advisory Board Member and Board Member of Environmental Defense Fund

One of life’s great privileges is the opportunity to choose how you want to spend your time.  What you want to do with your life.  In the early 1980s, there came a moment when I felt I had that privilege.  

I had spent the prior 20 years or so twice serving in the State Department – once negotiating international aviation, shipping and telecommunication agreements, and once leading the Bureau that administered the sensitive Refugee Program.  I had also been a practicing lawyer, an officer of an international airline, and a partner in a firm that turned around failing businesses – the most important of which was the large but bankrupt Penn Central Transportation Company.  Environmental issues were not on the scene.

(Later, in the 1990s, I would return to the State Department as an Under Secretary and as lead U.S. climate negotiator.) 

I began to think about what was I giving back to the society that had treated me so generously.  My wife suggested that I concentrate both my charitable giving and my energies in a specific area.  Following that advice, I studied my options, and gravitated toward environmental issues.  Not only did these seem important, but also because – and in this differed from most other philanthropic endeavors -- they required blending four intriguing disciplines:  science, economics, law and politics.

As a practical matter, my entry would have to be via the environmental NGO community.  As I studied that community, it seemed that most organizations at the time rejected the idea that it was proper to test regulations and laws by economic criteria – such as a simple cost/benefit analysis.  Nor did most accept that market mechanisms, such as taxes or a cap-and-trade regime, could help solve environmental problems.  Generally, there was a widely-shared belief that the business community was the problem, and could not become part of the solution.

All three notions seemed more wrong than right.   I searched for an organization that to some degree shared my views, and joined the board of the Environmental Defense Fund (EDF).  Soon thereafter I became its Chairperson.

The chief scientist of EDF then was Michael Oppenheimer (now at Princeton), and I believe I first heard the term “global climate change” from him.  As I learned more, it seemed clear that this environmental threat would become the defining issue for my generation.  Thus, it should be where I would concentrate my energies.

Climate Change, however, demanded a broader effort than any one organization could provide.   It would require (a) economic research on the various costs and benefits of climate mitigation, (b) a much more hands-on political effort, and (c) an environmental advocate with a presence in all 50 states.  So, I joined the boards of Resources For The Future and the League of Conservation Voters (becoming soon thereafter chair of both boards) and the board of The Nature Conservancy.

The more involved I got, the clearer became yet another proposition:  It would be useful to try to work with the business community rather than simply fight it.  This was a community that had resources and political influence.  If these could be brought constructively to bear on the climate issue, they had the potential to be game-changing.

There is evidence that points in this direction, stemming from EDF’s work with Walmart, McDonalds, FedEx, as well as the work of other NGOs  -- such as C2ES and The Nature Conservancy – with the business and finance community.

On a direct personal level, I was glad to have a chance to demonstrate the truth of this proposition via my work with ExxonMobil, where I am a member of a panel named by the company to advise it on its social responsibility agenda and its annual social responsibility report (which it calls its Citizenship Report).

Additionally, at this moment I am engaged in raising impact investment-type moneys to fund innovative technologies that could speed the production of useful products (such as concrete, carbon fiber, intermediate chemicals, etc.) using the carbon that comes out of power plant and industrial plant smokestacks.

Soon after the founding of Terra Alpha Investments, Tim Dunn approached me about joining its Advisory Board. This seemed to be a logical next step in my journey, and I happily agreed.  Terra Alpha’s investment decision-making approach recognizes that being more efficient with natural resources will enhance long-term business returns. The firm also advocates this message to business leaders and other investors. This blend of better business as part of a better environment and better world, fits with my view, and I am happy about its success so far.

Frank E. Loy - Terra Alpha Advisory Board Member and Board Member of Environmental Defense Fund
 

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