Investing With Purpose

June 16, 2022

In this episode of Engaging Alternatives Spotlight, Elana Margulies-Snyderman, Senior Manager, Publications, EisnerAmper, speaks with Timothy Dunn, Managing Partner and Chief Investment Officer of Terra Alpha Investments, a Washington D.C.-based sustainability investment firm. He shares his outlook for sustainable investing including the greatest opportunities and challenges, thoughts on the SEC’s rules to enhance ESG disclosures, how the firm is addressing DEI and more.


Transcript

Elana Margulies-Snyderman:Hello, and welcome to the EisnerAmper Podcast Series. I'm your host, Elana Margulies-Snyderman. And with me today, it's Timothy Dunn, Managing Partner and Chief Investment Officer of Terra Alpha Investments, a Washington DC based sustainability investment firm. Today, Tim will share with us his outlook for sustainable investing, including the greatest opportunities and challenges, thoughts on the SCC's rules to enhance ESG disclosures, how the firm is addressing DEI and more. Hi Tim, thanks for being with me today.
Timothy Dunn:Hey Elana. Nice to be with you.

EMS:
Tim, tell us a little about Terra Alpha Investments and how you got to where you are today.
TD:So Terra Alpha, as you said, is a sustainable investment firm that also has a focus on impact at a systemic level. We're based in Washington, DC, as you said. We manage private investment funds and institutional separately managed accounts. And our investor base is therefore limited to accredited individuals and entities. Our philosophy as an investment firm is really to allocate our investors capital into publicly traded equities of companies that are profitably leading a transition to a truly sustainable economy. So in that sentence, there's a couple things. One, profitably leading, we are more investing in more mature companies that are more established than sort of the kind of, some of the venture capital like companies that have popped into the market in recent years. So we're looking for a company that has a path to, or is already profitable or has a path to it very in the near term.

In terms of truly sustainable, we think about truly sustainable as companies that are actually serving real needs of society and operating within the plant's natural resource boundaries. So that's how we define when we're looking for a company. I co-founded the firm in 2014 after having spent 19 years at Capital Research, which is a very large public equities' manager that many people know mostly probably through their 401k or their 529 plan. And at Capital, I was managing about 26 billion of equities across several funds that were global funds. After I left capital, I spent five years doing pro bono work for environmental organizations, such as the Nature Conservancy and the Carbon Disclosure Project, now known as CDP. And there, I was trying to help them engage with companies and investors on environmental challenges, but really ended up learning a lot about the actual ways that the information sets are we have around companies and their environmental impacts.

So, and I should point out, I currently serve on the Virginia Chapter of the Nature Conservancy as well as on the Global Leadership Council of the World Resources Institute. Terra Alpha as a firm has a strong team of investment professionals who have over 75 years of investment experience and deep of environmental issues. As we think about how to think about the long term opportunities for a company, how a company operates in our rapidly changing world. We also have an incredible advisory board, which I'm very proud of, includes three PhDs and the former head of NASA, as well as the former head of NOAA. So we bring all that investment experience and expertise as well, as our deep understanding of environmental risks and challenges facing society and combine that in order to seek out superior financial returns for our investors, as well as environmental returns. And alongside that, we actively engage with companies to drive more rapid change, to become to a more sustainable business practices and change in our sustainability of our planet.
EMS:Tim, what you're doing is a very exciting, timely, important and topic. So I thought we'd start off this conversation by sharing your outlook for sustainable investing.
TD:I guess by definition, we started sustainable investment firms seven and a half years ago. And that kind of indicated that we thought that, my opinion was this was the where the world needed to go. The investment world needed to go because we, and it was sort of an inevitable and natural evolution and the investment process. The investment industry has evolved for decades and centuries really in terms of learning new things and learning about investing in new products or understanding different things about companies. We didn't used to have a 100 years ago, the accounting system, we didn't actually know the sales numbers for companies. We didn't necessarily even know who was on the board of directors. So we're always getting new information sets. And I think that the sustainable investment community in process is really trying to take a whole new level of expanding out the things we think about.

It's really working to recognize and identify companies that are going to be resilient in the future. As we go through this transition of our economy, that to one, that can actually thrive long term, be sustainable on a planet that has over 9 billion people. I think of it as just a more holistic look at a company that incorporates all sorts of other factors that have previously been considered not relevant to the investors, but have always really been relevant. We just chose to ignore those. And ultimately we think that those companies that we identify as, being best placed to manage the intersection of business and society and with the environment will just be great long term opportunities for investors and the avoidance. It also help you avoid companies that are just not going to do well in that same environment.
EMS:Great, Tim, that's a nice segue into the next question I had for you is, where specifically, do you see the greatest opportunities looking ahead in this space?
TD:Well, again, it kind of going back to the core of our premise, which is that we are facing a transition to very different economy in terms of what is and the expectations of the economy and on companies that are operating that economy in order to be successful. I mean, the availability information, the transparency, but also the seriousness of the issues that companies are facing just requires them to be better placed. And so we think that the companies that are leading the transition, and we have our own definition of what that means by leading. I will reap the benefits of being more efficient with, and also less dependent upon the increasing limited natural resources on our planet, such as clean air, water, healthy soils, and forest oceans. While those that delay are going to face competitive disadvantages, in some cases may find they're not able to operate. They'll lose their license to operate because they're overly using water resources.

I mean, you think about just challenges in places or around the world where there's already shortages of water and companies want to set up a factory there, and there's not enough water. They have to figure out, you can either say, well, we just won't operate there. Or you can figure out a way to use less water. The second one, clearly a better option for the long term growth of the company. So we think that, so ultimately we're looking for leaders that are building more resilient businesses in order to adapt to the change. You think about the changes we've had in the last 26 months. And you think about how the world has changed in 26 months, and then think about you're the CEO of a company or the part of the C-suite and a board. Your ability to kind of think about these issues and develop resilience to these around these issues is incredible.

I mean, you think about COVID and catastrophic weather and political crises and not to mention the invasion of Ukraine. And every company multinational around the world has to pivot to each of these issues and figure, have a plan and be able to deal with it. So we think that it's ultimately, the leaders in the transition are going to garner not just lower cost of capital and a higher stock valuation because of their leadership, but also they're going to win the battle for customers and employees. I mean, you think about companies we're investing in, I mean, Tesla has lots of critics, but they certainly are both getting a high multiple, and getting a strong customer base. We invest in a lot of less known companies like SalMar, which is in Scandinavian, salmon fishing offshore, aquaculture business. Growing demand for their product, very sustainably harvested approach and high protein, or a company like TOMRA, which is a Scandinavian also recycling equipment manufacturer. I mean, these are companies that are just leaders across, in their fields and are seeing growth in all levels.
EMS:Tim, to shift gears a little bit. I wanted to ask you, what are some of the greatest challenges you're currently facing?
TD:Every firm, every organization is constantly facing challenges. I mean, it is interesting because I obviously worked for a very large investment firm where, my job solely was managing money. Which some days seems like an easy job relative to managing a firm and managing people and finding investors and all those other things. And as a small independent firm, we definitely face some hurdles. I mean, the investment side, actually, frankly, we feel pretty confident about it. We've demonstrated a pretty good ability to do that, it's what we've all done for most of our lives. But we do have hurdles, for instance, just reaching investors and explaining our process. I mean, we are limited to accredited investors and that's fine, that's the protocol, the SCC. We also find that our global multifaceted, fairly systemically impactful investment thesis can be hard for people to really get their arms around.

It's a little easier if you're just a clean tech fund or a water fund, but we're really looking at companies across the globe and around all across all sectors. And it can be a little harder to get people's heads around that. And clearly in the last couple years, when the interest in ESG investing broadly has been so strong and, pretty much every investment firm now has an ESG strategy. It's hard for investors to really distinguish between those who are just talking talk and those who are deeply authentically doing sustainable research. But we're seeing pretty good interest from the target audience we have. And then of course you have a timeline issue that is, we're a long term, long, only active manager. We are weeded to our strategy. And when you go through a period like 2022, where the market has changed dramatically, we don't need to go through all the things that have happened in 2022.

But it clearly has been a shift in the market psychology towards more value oriented and cyclical names. Obviously the oil and gas sector has done stocks have done incredibly well. And so, that's something that we have to live through. I mean, the value of investors live through 10 years of under performance. So, six months is a pretty small period of time in that. But we have to be have make sure our investors are prepared for that kind of under performance and that we as a team are. So those are the biggest challenges.
EMS:Tim, I'd be remiss if I failed to ask you your thoughts on the SCCs proposed rules to enhance ESG disclosures. So I'd love to hear your thoughts about that.
TD:Well, there's two things the SCCs proposed that we're very interested in and very relevant to our work. One is their proposed rules around climate change disclosure for companies. And we are big supporters of the proposed rules that they put out, particularly around greenhouse, which focuses on greenhouse gas emissions. And if both, for companies operations and their product and supply chain, which is called scope 3 in the latter part. We think it's essential for publicly traded companies to measure and manage their own operational and their product greenhouse gas emissions. And in turn, we think their suppliers should be doing the same, because those are companies too. And if their suppliers are doing that, then the companies will have that information. At the same time, the SCC is putting out some proposed rules and it's really less developed rules at this point, but proposed plan to have rules around ESG disclosure for asset managers.

And we think that's really essential because there's so much confusion in the marketplace about what ESG really is and what if, you're investing a particular fund or strategy what you're actually getting and what that asset manager, that investment manager's going to be delivering to you or what their approach is. So we think it's actually really helpful for the investor to have more clarity around those rules. And so, but we don't fully know what the SCC is going to propose in more detail.
EMS:Tim, I wanted to ask you about DEI, which has also been a very pertinent topic over the last couple of years and see how your firm is integrating that.
TD:Yeah, it's a great question. And it's something that we've always had a philosophy around the value of diversity of perspective and lived experiences for any organization, whether it's a public company, a political group of an investment firm. And we think that enhances decision making and organizational resilience to have that diversity of backgrounds and experiences rather than having everyone to the same school looks the same and so on. And we've always had since the beginning, we've a very diverse board of advisory board and we've looked at companies diversity of the senior management board as part of our analysis, always. But we realized last year, we undertook a more thorough assessment or DEI initiatives and acknowledged, we had a lot of room for improvement ourselves.

We articulated last fall, a formalized DEI program that states our commitment to improved our diversity and equity and inclusion within our firm, as well as within our portfolio companies. And this initiative, it has four pillars to it that really get into how we foster and support equity inclusion within the firm. How we attract more diverse talent, how we engage with companies on their own diversity, and then how we report to our investors about the companies we're investing in. So they know how the portfolios diversity looks like.
EMS:Tim. We've covered a lot of ground today. And I wanted to see if you have any final thoughts you'd like to share with us.
TD:Sure. Well, I hope if nothing else, anyone listening to this podcast will consider or video, depending on how they're doing it, will consider their own investment approach or the investment professional who's managing their money to see if they're truly aligned with their long term needs. Not just their immediate financial needs, but also the needs of society and their needs for critical natural resources. Again, we all need clean air and fresh water. We all need a healthy forest soils, oceans, biodiversity. It's in our own best long term interests that are investments, which are probably the most powerful tool we have to cause change whether, it's positive or negative, no matter who you are, that most of us have.

And there's two different areas, would've been viewed as two different areas, the environment and the economy shouldn't be used conflicting goals like, well, we need to grow the economy. So we've destroyed the environment, or we need to protect the environments, so we need to shrink the economy. We need to think of these as rather critically interconnected elements and build a more sustainable economy while transitioning how we operate to bases long term benefit to all living things on the planet.
EMS:Tim, I wanted to thank you for sharing your unique perspective with our listeners today. And thank you for listening to the EisnerAmper Podcast Series. Visit eisneramper.com for more information on this in a host of other topics and join us for our next EisnerAmper Podcast when, we get down to business.

Transcribed by Rev.com

About Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.


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