newsletter 2q 2017 - terra alpha

TerraAlphaInvestmentsNewsletter2Q2017

AdvocacyUpdateInordertoimprovecorporatedisclosureofkeyenvironmentaldataandinformation,wehadpreviouslydevelopedaTAIIdealDisclosureofCorporateEnvironmentalDatatableanddocument.Duringthispastquarter,wesentthistoeachportfoliocompanyCEOandInvestorRelationsteamtointroduceitasatemplatewewillbeusingtoevaluatecompanies.Itlaysoutthematerialinformationwebelieveinvestorswillincreasinglyrequestfromcompaniestoaidinvestmentdecisions.Wehavealreadyhadresponsesfromquiteafewofthecompaniesreferencingtheirefforts,andsomerequestingtoconsultastheyformulateeffortsaroundenvironmentaldatacollectionandtargetsetting.Inthesecondhalfof2017,companyengagementwillbemoretargetedtospecificcompaniesandtheiruniquedisclosureprofiles.AdvocacyinAction:Thisspringwesoldaportfolioholdingthathadsimplystoppeddisclosingkeyenvironmentaldata.Wehadengagedtheminconversationsinquiringwhywecouldnot

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

alignedwiththeworld’sfinitenaturalsystemstohelpcreateabetterworld.

DearInvestorsandFriends,Thespringof2017hasbeengoodforTerraAlphaonmanyfronts,inspiteofUSFederalpolicysetbacksonenvironmentalissues.Inthisnewsletter,youwillgetanupdateonthefund,thefirm,andlearnmoreaboutouradvocacywork.Onthelattertopic,wearepleasedtohavebecomeasignatorytothePrinciplesforResponsibleInvesting(PRI)andtohavejoinedtheSASBAlliance(detailstofollow). Ourfirmcontinuestobuilditscapacitywithtwonewadditionstoourstaffinthelastmonth.NathanielSchwartz,whointernedwithuslastsummer,joinsasamemberofournowsix-strongresearchteam,postgraduationfromAuburnUniversitywithadegreeinFinance.Hewillbefocusingontechnologyandcloud-basedcomputingcompanies.ForestStone,arecentgraduatefromDickinsonCollegewithadegreeinInternationalBusinessandManagement,withaconcentrationinEconomics,joinstosupportourInvestorRelationswork.Onasomewhatbittersweetnote,someofyoumayalreadyknowthatourAdvisoryBoardmemberKatherineCollinshassteppedintoanewroleatPutnaminvestmentsinBostontospearheadSustainableInvestingatthefirm.WearehappyforherandknowPutnamisluckytohaveKatherine’stalentandfocusin-house,thoughitalsomeansthatshewilltakealessactiveroleatTerraAlpha.

TerraAlphaInvestments,LLC

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findthepreviousyear’sdataandhadaskedbluntlyfortheresumptionofdisclosure,buttonoavail.Theconversationandtheirdecisionwerediscouraging,althoughhaltingdisclosurecontradictsthecontinuedtrendtowardgreatertransparency,andthecontinuedincreaseintheoveralluniverseofcompaniesthatdodisclosedataglobally.OtherAdvocacyhighlightsthisquarter:

• WebecameasignatorytothePrinciplesforResponsibleInvesting(PRI).Bydoingso,wearestatingthatwewillupholditssixbasicprinciplesofresponsibleinvesting.Ourmissionandprocesshavealwaysbeenfullyinsynchwiththem.WehavebeeninvitedandhaveagreedtojoinacombinedPRIandCFAworkinggroupfocusedonhelpingPRIsignatoriesintegrateEnvironmental,Social,andGovernance(ESG)intotheirinvestmentprocesses.

• WejoinedtheSustainabilityAccountingStandardsBoard(SASB)Alliancetoexpandourabilitytosupporttheirwork.(Lastyearwecontributedacasestudytotheirsymposium.)SASBworkstocreatestandardsofmaterialdisclosureforenvironmental,socialandgovernanceinformationfromcompanies.

• TimgaveaguestlectureatUniversityofMarylandExecutiveMBAprogramaspartofProfessorCaryKrosinsky’scourseonSustainability.

• WebecameamemberinboththeIntentionalEndowmentNetwork(IEN)andintheMissionInvestorsExchange(MIE)toadvocateforEnvironmentalProductivity.Weareverypleasedtobesupportingtheworkoftheseorganizations.IENsupportscolleges,universitiesandothermissiondrivenorganizationsinaligninginvestmentswithvalueswhileupholdingfinancialreturn.MIEisanestablishednetworkoffoundationsworkingtoaddressenvironmentalandsocietalchallenges,andareengagedinimpactinvesting.

• WecontinuedourinterestintheresearchworkoftheWorldResourcesInstituteandmetwithexpertstogetanupdateonandsharethoughtsabouttheirGHGProtocol,aswellastheirwaterstressevaluationtool,Aqueduct.Aqueductisbecomingmuchmoregranular,whichwillmakeitmorepowerfulforusers.TheGHGProtocolisworkingtoimprovequalityandquantityofdataandexpandmoreScope3reporting.

TAI-connectedarticlesandbookswerecommend:

AdvisoryBoardMemberGeorgeSerafeimco-wroteaninsightfularticlefortheHarvardBusinessReviewontheimpactsofshort-termism-HowLawsandCultureHoldBackSociallyMinded

Companies.ReadinfullhereAdvisoryBoardMemberEllenStofanwasfeaturedinarecentGuardianarticleonthe

importanceofClimateScienceandherconcernsabout“fakescience."Readthearticlehere

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ResearchAdvisorJillBakerwroteanexcellentpieceforForbes.comonIndia:WhyIndiaThinksaTrillion-dollarPriceTagisStayingintheParisAccord.Readhere

AdvisoryBoardMemberEmeritusKatherineCollins’bookNatureofInvestingwasjustlistedasoneofTED.com’s101summerbookstoread.Welovethebookandtheinsightsitprovides.

TerraAlphaInvestmentsLLChasachapter(NavigatingRoughWater)inCaryKronsinsky’sbookSustainableInvesting,whichisbeingtranslatedintoMandarinatthedirectiveoftheChineseFinanceMinistry.Findacopyhere

ReflectionsfromFranceinMay-AmyDineAmywasabletomeetwithsomecompaniesinFranceinanAdvocacycapacityinMay

MostremarkablewasconfirminghowdeeplytherecentEnvironmental,Social,andGovernance(ESG)regulationpermeatesFrenchcompanies-bigandsmall-andthattheimpactisveryreal!Article175upholdsemissionstargetsbasedona2-degreescenario,aswellasexpectingESGreporting.Article173requiresassetowners-andbyextensioninvestmentmanagers-toreportclimatepolicy,witha“complyorexplain”expectation.Thisiscausingwidespread,seriousself-examinationbycompaniesinordertoanswerquestionsandmeetexpectationsofinvestmentmanagersneedingtoevaluatetheirportfolioholdings.TheregulationhasspurredgreaterLifeCycleAnalysis(LCA)ofproducts-i.e.detailedunderstandingofenvironmentalimpactsatallstagesofproductionandexistence(explainedmoreintheboxbelow).Frenchcompaniesarethinkingmoreabouttheend-of-useful-lifestateoftheirproducts,theintentoftheirproductstopromotegreaterresourceefficiencyornot,aswellasthinkingmoreaboutthenaturalresourceuseoftheirfleets,processes,andbasicbuildingoperations.IhadafascinatingmeetingwiththeconsultancyfirmQuantisinParis.TheyareoneofthemostinvolvedindoingLCAforconsumerproductcompanies.Inmeetingswithportfoliocompanies,itwasconfirmedtheregulationeffectsaredeep-theygodownthesupplychaintosmall,privatecompanieswhomustevaluatetheir

TerraAlphaInvestments,LLC

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environmentalimpacts.Thismessagecamethroughclearlyfromverydifferentbusinesses.ThetripwasstrikingalsointhatIwastherebefore,during,andaftertheInaugurationofEmmanuelMacron.Thepositivesocialenergyanticipatingthenewgovernmentwaspalpable.Itshowedupinthesmallestinteractionswithshopkeepersandrestaurantstaff,fellowbaguettebuyersinaqueue,andeveninconversationwithParisianteenagers.Surprisingtome,therewereveryfewcampaignpostersinevidence-thiswasonlythesecondweekofMayandtheywerescarceinapassthroughNormandy,andinParis.TheFrenchInaugurationitselfthatSundaywasadecidedlylow-keyeventvs.howInaugurationdaysturnWashingtonupsidedown.Economically,inthepathofmytravelsandmovingaroundthecityofParis,itwasbustlingwithconsumerspurchasing,andconstructionprojectsgoingonatvariedscales.

InsightsfromanextendedstayinHongKong-JillBakerJill’scommentshelptoilluminatesomeofthetensionsinHongKong

IspentmostofAprilandintoMayworkingonanon-TerraAlphaprojectinHongKong.Withintensepopulationdensity,wealthandpovertymixopenlyinthestreetlifewhilethewealthdisparityincreasinglywidens.Infact,measuringtheincomeinequalityviatheGiniCoefficientputsHKattheglobalhighend,equivalenttothatofColombiaorGuatemalainJuneat.539.Withasimpleincometaxstructure–maximum15%onsalaries,16.5%oncorporateprofits,andnotaxondividendsorcapitalgains–HongKongremainsattractivetothewealthy.Thelargestcomponentofinflationishousing,fromrentalexpense.Nanoflats,measuringlessthan400squarefeetandcostingaboutHK$4million(US$519,480)onaverage,areincreasinglypopularandillustratethehighpriceofrealestate–astrainwhenthemedianmonthlyincomeisjustHK$15,500(US$2,012).InthefirstquarterGDPgrew4.3%,andisexpectedtorise2-3%thisyear,withanunderlyinginflationforecastof2%.Theunemploymentrateis3.2%andhashoveredthereforthepastsixorsoyears.Theeconomicgrowthandthegovernmentcoffergrowth-fromthepremiumontheexpensiveHKrealestatemarket-continue.AstheSouthChinaMorningPostheadlineattests,“HongKong'sbudgetsurplusunderestimatedforeighthyearinarow.”Inthemostrecentfiscalyear,governmentrevenuerose27%toHK$573B;drivenbyprofitstax(frombusinesses,24%oftotal),landpremium(23%),stampduties,andsalariestax-togetheraccountingfor71.4%ofthetotal.Itsstockexchange,theHKEXhasbeenasourceofIPOcapitalformanymainlandcompanies,andisnowconnectedwiththelargerShanghaiandShenzhenexchanges.ChinaisHongKong’slargesttradingpartner,andatremendousvolumeoftrademovesthroughitforre-export.Notallofthatmoneyislegitimate,asHongKongisaconduitforMainlandcapitalseekingtoleavethecountry.ThelesspositivetraitthatpermeatesHKthough,isthelackofrealadoptionoftheOneCountryTwoSystemsintermsoftheruleoflaw.Thiscontinuestosituneasily-itwasacutelyfeltinJanuarywiththeabductionofbillionairefounderoftheTomorrowGroupfromhisapartment,following-onfromthewell-publicizeddisappearanceoffivebooksellersintoChina.

TerraAlphaInvestments,LLC

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Didyouknow?LifeCycleAnalysis(LCA)isaprocessofanalyzingaproduct’slife-timeenvironmentalimpact.Theassessmenttakesaninventoryofmaterials,energyuseandemissions,andtheimpactontheenvironmentateachstageof“life”ofaproduct.Thisistrackedfromtheextractionoftherawmaterialsused,theenergyrequiredandtheemissionscreatedbytheextraction,theprocessingofmaterials,themanufacturingprocess,thedistributionmethod,theimpactwhileitisinserviceinitsintendeduse,andalsotheenvironmentalconsequenceswhenitisdiscarded.TheuseofLCAhasspurreda

burgeoningeffortinmanufacturingtothinkbeyondthesaleofaproducttomaketheenvironmentalimpactaslowaspossible.

Spotlight-JacobHamptonJacobjoinedTerraAlphanearlytwoyearsagoinAugust2015.Hehasbeenintegraltogettingourresearchcoveragetosuchagoodstateandhasbeenahelpfulmentortootheranalystsandinternsastheseniorresearchanalyst.Ontheteam,heisresponsibleforfundamentalinvestmentresearchandenvironmentalproductivityanalysiswithintheconsumersectorsandthepharmaceuticalsandmanagedhealthcarespaces.BeforecomingtoTerraAlpha,Jacobdidvariousstintsinprivateequity,publicequity,andventurecapitalduringgraduateschool,andbringssomeofthebenefitsoftheseexperiencestohisworkatTAI.Jacobalsoworkedpreviouslyintheconsumergoodsindustry.HeisintheprocessofearningtheCFAcharter.Jacobisatrue“Foodie”extraordinaire;wealsoknowwecanturntohimforrecommendationsasabeeraficionado.Anotherfunfactinhislifeisthatbeforetheageof18JacobhadlivedinMiami,St.Louis,Seattle,Dallas,Detroit,andChicago.Outsideoffinance,heenjoystraveling,cooking,weightlifting,andgamesofanysort.Lastly,butperhapsthebiggestnewswearethrilledtoshare,isthatJacobisengagedandisgettingmarriedthisfalltohisfiancéeShannon.WithHenry,theirCavachon(CavalierKingCharlesSpaniel&BichonFrise),theywillcontinueresidinginArlington,VA,aftertheirwedding.

TerraAlphaInvestments,LLC

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Inourincreasinglynaturalresource-constrainedworld,TAIwillcontinueadvocatingforbroaderadoptionofourprocess,increasedcorporateattentiontoresource-useintensity,

anddemonstrateitthroughbetterinvestmentreturnsinthemostenvironmentallyproductivecompaniesglobally.

Thankyouforyourinterestinandsupportofourwork.

Bestregards,TheTeamatTerraAlphaInvestments,LLC