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newsletter 2q 2017 - terra alpha

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Terra Alpha Investments Newsletter 2Q 2017 Advocacy Update In order to improve corporate disclosure of key environmental data and information, we had previously developed a TAI Ideal Disclosure of Corporate Environmental Data table and document. During this past quarter, we sent this to each portfolio company CEO and Investor Relations team to introduce it as a template we will be using to evaluate companies. It lays out the material information we believe investors will increasingly request from companies to aid investment decisions. We have already had responses from quite a few of the companies referencing their efforts, and some requesting to consult as they formulate efforts around environmental data collection and target setting. In the second half of 2017, company engagement will be more targeted to specific companies and their unique disclosure profiles. Advocacy in Action: This spring we sold a portfolio holding that had simply stopped disclosing key environmental data. We had engaged them in conversations inquiring why we could not At Terra Alpha, we believe that a portfolio of the world's most fundamentally strong, attractively valued, and environmentally productive companies will provide our investors with better long-term risk-adjusted returns. We believe that asset owners also want their investments to reflect their shared interest in a better environment for all. We believe that our investment process and our advocacy work will drive the global economy to be more aligned with the world’s finite natural systems to help create a better world. Dear Investors and Friends, The spring of 2017 has been good for Terra Alpha on many fronts, in spite of US Federal policy setbacks on environmental issues. In this newsletter, you will get an update on the fund, the firm, and learn more about our advocacy work. On the latter topic, we are pleased to have become a signatory to the Principles for Responsible Investing (PRI) and to have joined the SASB Alliance (details to follow). Our firm continues to build its capacity with two new additions to our staff in the last month. Nathaniel Schwartz, who interned with us last summer, joins as a member of our now six- strong research team, post graduation from Auburn University with a degree in Finance. He will be focusing on technology and cloud-based computing companies. Forest Stone, a recent graduate from Dickinson College with a degree in International Business and Management, with a concentration in Economics, joins to support our Investor Relations work. On a somewhat bittersweet note, some of you may already know that our Advisory Board member Katherine Collins has stepped into a new role at Putnam investments in Boston to spearhead Sustainable Investing at the firm. We are happy for her and know Putnam is lucky to have Katherine’s talent and focus in-house, though it also means that she will take a less active role at Terra Alpha.

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Page 1: 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.

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TerraAlphaInvestments,LLC

2QNewsletter│June2017│2

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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TerraAlphaInvestments,LLC

2QNewsletter│June2017│3

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

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2QNewsletter│June2017│4

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.

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TerraAlphaInvestments,LLC

2QNewsletter│June2017│5

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.

Page 6: Newsletter 2Q 2017 - Terra Alpha

TerraAlphaInvestments,LLC

2QNewsletter│June2017│6

Inourincreasinglynaturalresource-constrainedworld,TAIwillcontinueadvocatingforbroaderadoptionofourprocess,increasedcorporateattentiontoresource-useintensity,

anddemonstrateitthroughbetterinvestmentreturnsinthemostenvironmentallyproductivecompaniesglobally.

Thankyouforyourinterestinandsupportofourwork.

Bestregards,TheTeamatTerraAlphaInvestments,LLC


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