newsletter 1q 2017 - terra alpha

TerraAlphaInvestmentsNewsletter1Q2017

DearInvestorsandFriends,Inouryear-endnewsletter,wesharedourthoughtsabouttheimplicationsofthechangeinadministrationintheUS.WecontinuetoseelittlenegativeimpactonourportfoliocompaniesfromanticipatedUSFederalpolicychanges,thoughweexpectsomeactionsthatcouldaltercompanystrategiesorpolicies.WewillbewatchinghowEuropeanandAsianleadersrespondtoUSactionsonenvironmentalpolicies.Todate,wehaveseennoreactionsthatgiveusconcernregardingourinvestmentapproach.Encouragingly,wehaveseenanincreaseininterestinourfirmandouruniqueadvocacyinvestingmission.And,thefund’sfinancialandenvironmentalreturnscontinuetobeverystrongthusfarin2017.Inthisnewsletterweshareinsightsabout:•ourglobaltravelsinthefirstquarter•ourrecentlyreleasedIdealDisclosureframeworkforcorporatereportingonenvironmentaldataandinformation•wherewehavepresented/advocatedforEnvironmentalProductivitythisquarter•theexpansionofourteamandaspotlightonourco-founderAndrewGeller

AtTerraAlpha,webelievethataportfoliooftheworld'smostfundamentallystrong,attractivelyvalued,andenvironmentallyproductivecompanieswillprovideourinvestorswithbetterlong-termrisk-adjustedreturns.Webelievethatassetownersalsowanttheirinvestmentstoreflecttheirsharedinterestinabetterenvironmentforall.Webelievethatourinvestmentprocessandouradvocacyworkwilldrivetheglobaleconomytobemore

alignedwiththeworld’sfinitenaturalsystemstohelpcreateabetterworld.

TravelReflectionsWorldEconomicForum,Davos2017-thoughtsfromourCIO

TimDunn,CIO,whoattendedtheWorldEconomicForuminDavosinJanuaryasanaccompanyingguestofoneofourAdvisoryBoardmembers,EllenStofan.

SomeofhisbrieftakeawaysthatarerelevanttoTerraAlphaInvestments’workfollow:ClimateChangeandEnergyMarkets–Thereweremanyencouragingsessionsaboutpolicy,academic,andcorporateprogressoneffortstostopormitigateclimatechange,butthechallengesremainimmense.TheTrumpadministrationcannotstopglobalmomentum,thoughitislikelytosignificantlyslowUSefforts,andrecentactionsunderlinethispoint.•AsoberingsessiononGlobalEnergymarketsremindedmeofthecontinuedinfluence/importanceofthefossilfuelindustry,despiteourdecarbonizingeconomy.•Chinawillspend$360Bonrenewableenergyinvestmentsinthenext10yearsandSaudiArabiawillspend$50Bby2030onrenewables,butglobally$460Bwillbespentonoilandgascapacityin2017.

TerraAlphaInvestments,LLC

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TheSaudiArabianOilMinisteriteratedthattheyexpecttobesellingtheiroilgloballyfor“generations”andanticipateselling“everymolecule”ofoilintheirreserves.•InternationalEnergyAgencycontinuestoprojectgrowingoilandgasdemandin2017andbeyond.•Carbonpricing(orastheCanadianEnvironmentalMinistersuggestswecallit,“CarbonPollutionPricing”):Thereisrealprogresswithmorecompaniesusinginternalpricingof$20-50/ton.Canadaisphasinginapriceof$10/tonrisingto$50.Notably,economistsLordSternandJoeStiglitzareworkingonareportdueinAprilonarecommendedpriceforpolicymakersaroundtheworld.

FourthIndustrialRevolution(4IR)–Thisreferstothecombinationoftechnologiesthatarelikelytosignificantlyalteroureconomicsystemintheyearsahead:Robotics,ArtificialIntelligence(AI),4Dprinting,VirtualReality(VR),InternetofThings(IoT),QuantumComputing,Genomics,etc.Therewasaragingdebateonwhetherthis4IRisgoodorbad.•Generallytechorientedfolkssayyes,economistsandacademicsareverymixed,politiciansandpolicy-makersaremoreconcernedthanexcited.•IleftmuchmoreintriguedbytheimplicationsofBlockchainonavarietyofsectorsduetoitsabilitytoassuredataintegrity(thinkmedicalrecords)andmaketransferofallsortsofthingsmoresecure(currency,data,etc).•IamalsoveryinterestedintheabilityofhandhelddevicesandAItoimprovetheaccesstomoreaccuratemedicaldiagnosisglobally.•Thereisnodoubtthattheimpactsoftheworkforceareverylargeandnoonehasasolutiontothedislocationsthatarelikelytofollow.(Note:alreadytherearecurrently200millionunemployedpeoplegloballytoday.)Water/Oceans–Therehasbeenmajorprogressonbuildingaglobalinfrastructuretoprotectoceans,inpartthankstotheUNSustainabilityDevelopmentGoal(SDG)#14withafocusonillegalfishing,pollution(plasticsandfertilizerrun-off),acidification,andgovernance.Seafoodexportsare$148billiongloballyand50%ofallseafoodsoldisfromaquaculturevs.fromcatch.Certification(MSC)isgrowingandgettingmorerobustthankstotechnology.AquacultureseemstobemovingintoabetterplacewithlittlenegativecommentaryfromNGOs.

TerraAlphaInvestments,LLC

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Traditionally,toomuchwaterhasbeenusedinproductionprocessesbecauseitwasalwaysthecheapestwaytomove,clean,andcooldownthings.Withtechnologyimprovements(cheapersmartsensors,improveddatadelivery,andquantumcomputinganalysisofproductionprocesses)thereismoreabilitytoefficientlymanagethisfiniteresource.Increasingdisclosureofwateruseisleadingtomoreawarenessofrisksandopportunities.Healthcare-Globallywespendalmostallofhealthcarefundsoncepeoplearesickratherthantoenhancehealthylives.GovernmentfundingistoofocusedonCommunicableDisease(e.g.,HIV,Ebola)eradicationandnotenoughonthemajorNon-CommunicableDiseases(e.g.HeartDisease,Diabetes,Malaria)Theglobalpopulationhasgonefromapyramidbasedonincome,toadiamond.Theproliferationofhealthcareappsfordevelopingcountriesbystart-upsandNGOsisoverwhelmingforlocalproviders.HumanitarianChallenges-Todaythereare65millionforciblydisplacedpeopleglobally–thehighestever.51%arechildren.Weneedgrowingattentiontoprovidingeducationtothisgrouptoavoida“lostgeneration”(HighlightedwastheClooneyFoundationeffortinLebanon)Short-termisminCorporateDecision-Making-accordingtoaMcKinsey&Costudy,ithascosttheworldfivemillionjobs,$1.3Tinassetvalues,and1%ofGDP.

HoChiMinCity,Vietnam–ResearchAdvisorreflectionsResearchAdvisorJillBakerattendedtheSpringForumoftheAsiaBusinessCouncil

inHoChiMinCity,VietnamVietnamisanamazingplace.ItisremarkabletothinkofitintermsofitshistoryoflongstruggleofwarsoverthecenturieswiththeChinese,theFrench,theAmericansandofcourse,theirowncivilwar.HoChiMinCity(HCMC)isratedthesecondmostdynamiccityintheworldbytheJLLCityMomentumindex,withimpressivehumancapitalandbiginfrastructureprojects.InlateFebruary,IattendedagatheringofCEOsinHCMC,duringwhichwemetwithhighgovernmentofficialsbothatthecityandcountrylevel.

Despiteseriouspollutionissues,itsleadersarechoosingtoemphasizecoal-firedpowerovercleaneralternatives.ThevitallyimportantagriculturalproductivityoftheMekongDeltaisatriskfromrisingsealevel,aswell,asIhavewrittenforForbes.com.Inlookingatbusiness“disruptors”,apanelfeaturedsomeofthehotyoungCEOsthatarechangingVietnam’s

TerraAlphaInvestments,LLC

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“IdealDisclosure”ofEnvironmentalProductivityMetricsbyCompanies

ThisquarterwedevelopedandreleasedourIdealDisclosureframeworktoaidourworkadvocatingtocompaniesandinvestmentprofessionalsaboutEPdataandinformationdisclosure.ThistablelaysoutwhatwewouldexpectfromourportfoliocompaniesregardingdisclosuredatafortheirGHGemissions,Water,andWaste.Webelievethattheinvestmentcommunity,asawhole,willbeincreasinglydemandingenvironmentaldatainformation;thisdocumentservesasatemplatefordisclosureofenvironmentaldatagoingforward.Youwillseethatitprogressesthroughanevolutionofdisclosurestagesuntilitiswhatwewouldconsider“Best-in-Class,”or,“Ideal”.Whilemanycompaniesareprogressingintheirdisclosure,nocurrentportfoliocompanymeetsourBest-in-Classcriteria.Wehopethatbyprovidinganidealguideline,itwillshowcompanieswhattypeofdatawebelieveismaterialtotheinvestmentprocess.

businesslandscape.Theydiscussedtheirbusinesses,includingthelargestco-workingspaceinVietnam;ahighlysuccessfulelectronicmarketplacefordigitalmobiledevicesthatisbenefitingfromfastgrowthinfintech;a13-year-oldventurecapitalfirmwhosefoundersharedinsightsintotheevolvingtrendsinaccesstocapitalforstartups,andtheequivalentofVietnam’sAmazonorAlibaba.Eachspokeofthechallengestheyface,includingexternalcompetition,regulationandthechallengeofmaintainingcustomerloyaltywhileinasteepgrowthtrajectory.TherewasapanelonDecarbonizationinASEANwithrepresentativesoftwoutilitieswithcontrastingstories,andabanker.Oneoftheutilitieswasanold-linecarbon-firedutility,highlydependentoncoal,strugglingtofuelswitchtonaturalgas.WhiletheParisClimateAccordandcountry-levelpledgeshaveprovideditsregulatorsmuch-neededpolicyclarity,makingaswitchischallenging.Theotherutilityhailedfromacountrythatisravagedbytyphoonsonaregularbasis.TheCEOspowerpointincludedaboutfiftyslidesinrapidsuccessionshowingthecountry’sdevastation.Hiscountry,hesaid,doesnothavetheluxuryoftime.Hisutilityvowednottoinvestincoalenergyandreliedsolelyonnaturalgas,geothermal,solarandwind.AformerCEOofalenderwhoseloanbookisskewedtowardcoalandcarbon-intensiveindustrycharacterizeddiscussionsoflendingtocarbon-intensiveindustriesasbeing“emotionallydriven”,citingpressurefromoutsideforceslikesocialmediaforcingexecutivestothinkdifferently.Hewaswellversedinthegrowingdialogaroundtheneedtobeawareofclimateriskinbankassetportfolios.

TerraAlphaInvestments,LLC

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AdvocacyUpdate

InouradvocacyforwidespreadEnvironmentalProductivity(EP)practices,weencourageshiftsinourcurrentcapitalmarketsthatgiveEPabetteropportunitytogaintraction.Withthatinmind,TerraAlphaissupportiveofeffortstoincrease“patientcapital,”i.e.,theperspectiveofinvestingforlong-termreturns,asaprincipleforbothbusinessesandforinvestors.EnvironmentallyProductivetechnologiesandprocessesoftenrequirelongertermpayback,forone.Aconferenceweparticipatedinwasfocusedonjustthisshift-movingawayfrom“short-termism”towardalong-termreturnhorizon.Itwastheinvitation-onlyinauguralCEOForceforGood,CECPCEOInvestorForum.58corporateCEOswerepresentincludingPG&E,EileenFisher,Welltower,BectonDickinson&Co.,Humana,Blackrock,Vanguard,Citi,IBM,Nielsen,TDAmeritrade,andothers,amidstinvestmentfirmsandinvestmentadvisors.ThethemewastoshinelightonhowinvestinginEnvironmental,Social,andGovernance(ESG)projectsreaplong-termbenefitsandenhancethebusiness.Therewasnoconsensusonwherethechangeneededtooccurinthecapitalmarkets-abitof“hotpotato”ensuedwhenthetopicturnedtodeterminingwherethechangeoffocusneededtocomefrom-corporateCEOswerequicktoidentifyinvestmentmanagers’focusonshort-termreturn,quarterlyguidanceby

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companieswascitedasculpable,annualbonusstructuresforAnalysts,aswell.AsmentionedearlierinTim’snotesfromDavos,McKinseyrecentlypublishedareportonthelosteconomicgrowthasaresultofashort-termperspectiveinourcapitalmarkets,andthetopicisgainingattention.Weareincreasinglyaskedtospeakaboutourinvestmentapproachtobusinessleadersandinvestors.ThisquarterwepresentedattheClimateLeadershipConferenceinChicagoaboutclimateriskdisclosure;wemoderatedapanelattheEthicalCorporationResponsibleBusinessSummitNYconferencewithFarooqKathwari,ChairmanofEthanAllenGlobalandJoyceHabouchaofRockefeller&Coabouthowinvestorscanworkwithcompaniesonlong-termthinking;andwehadanengagingconferencecallwithagroupofgraduatestudentsatUCSB’sEnvironmentalScienceprogramwhowantedtounderstandourinvestmentprocess.Wealwaystakeadvantageofopportunitiestolearnfromandshareideaswithexpertsinrelatedfields.Ofnote,wewereparticipantsatDukeUniversity’sFuquaSchoolofBusinessSustainableBusinessandSocialImpactconference,WorldResourcesInstitute’sGlobalForestWatchworkshop,aswellastheCommonFundForum,theInnovationForum’sSustainableAgriculture,andForestryconferences,andColumbiaUniversity’sEnergyForum.

TerraAlphaTeamNewsInsomeways,itishardtobelievethatanumberofTerraAlphateammemberswillcelebratetheirtwo-yearanniversariesinthecomingmonths.Aswecontinuetogrowourinvestorbaseandlookaheadtofurthergrowth,wehavedecidedtoaddanewmemberoftheteamtohelpmanagethisaspectofthebusiness.NikkiCarenzajoinedTAIinFebruaryasaninternwhowillbeprimarilyfocusedoninvestordevelopmentandcommunications.SheisarecentgraduateofSouthernMethodistUniversitywhereshereceivedaBBAinFinanceandaBAinEnvironmentalStudies.

TeamMemberFocus-AndrewGeller

AndrewisafoundingpartneratTerraAlphaInvestmentsLLC,andhasbeenacentralpartofTerraAlphaFund’sinvestmentteamsinceitsinception.Andrewprovidesdirectionandguidanceforourinvestmentprocess,andisthecomplianceleadforthefund,aswell.AftergraduatingfromThePennsylvaniaStateUniversity,Andrewbeganhis30+yearinvestmentcareerasanequityanalyst.AndrewandTimmetwhentheywerebothanalystsatPNCinPhiladelphiamanyyearsago.Hespentmorethanadecadeasananalystcoveringawidevarietyofindustries,yetthebulkofhiscareerwasworkingonthesell-side,aspartofinstitutionalequitysalesatOppenheimer&Co.Hesharedhismarketinsightswithlargemutualfunds,banksandothermoney

managers.Hisexperienceinequityanalysishasprovedimmenselyvaluabletothefundamentalanalysisofourportfoliocompanies.

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AndrewcurrentlylivesandworksinLosAngeleswithhiswife,Kate,asinger,teacherandmusictherapist.Andrewisapassionatecookandhashadstintsinthekitchensofsomeofthemostexceptionalrestaurantsthroughouttheworld.Hischocolatecakeisfamousthroughoutouroffice.Andrew’sguidanceiscrucialtothefundandhasbeenanintegralpartofTerraAlphaInvestmentsLLC’sgrowth.

Ourmailingaddressis:TerraAlphaInvestmentsLLC

POBox1622Middleburg,VA20118

www.terraalphainvestments.com

Inourincreasinglynaturalresource-constrainedworld,TAIwillcontinueadvocatingforbroaderadoptionofourprocess,increasedcorporateattentiontoresource-useintensity,

anddemonstrateitthroughbetterinvestmentreturnsinthemostenvironmentallyproductivecompaniesglobally.

Thankyouforyourinterestinandsupportofourwork.

Bestregards,TheTeamatTerraAlphaInvestments,LLC