Can Public Equity Funds Have Impact?
I must confess something. After years of listening to and watching many ESG and other so-called socially responsible public equity funds implicitly and explicitly claim they were making the world a better place - and after writing a pioneering book on the subject - I became deeply cynical. Tilting or timing away from, say, oil and gas companies or Tesla’s stock has little to any impact on how these companies actually operate. Few even seem to care. Chief financial officers know that, as long as they are generating reliable profits, even if multiple managers divest from their stock, someone else will always be there to buy it, albeit at a slightly cheaper valuation. The same was even true during the height of apartheid in 1962-86, when pension plans and other institutional investors all over the world divested from South African stocks. Despite unrelenting, global pressure, companies like BP, Royal Dutch Shell, and Barclays Bank not only maintained but grew their operations in South Africa. Anglo American, Gold Fields and De Beers never folded their operations and joined Nelson Mandela on the picket lines. They simply kept on operating, and their remaining investors largely made a killing through higher dividends.
Public equity investment and divestment seldom achieves any goal, I had concluded. So imagine my surprise when I met Tim Dunn and his colleagues at Terra Alpha. Tim had enjoyed a long, productive career at Capital Group before advising the Carbon Disclosure Project in its early days. Tim ultimately committed himself to building a new firm and investment process which generates long term financial returns while helping to build a sustainable future for all. Two core principles inform every investment decision at Terra Alpha: Environmental Productivity, and Enduring Business Models. Key thematics include decarbonization, electrification, urbanization, technological innovation, evolving food and agriculture systems, demographics and the impacts of climate change. Through education, engagement and collaboration, Terra Alpha has been consistently able to encourage its portfolio companies towards longer-term thinking and more sustainable, more profitable business strategies.
Two companies Terra Alpha has owned on and off over its decade of operation helpfully illustrate their investment thesis: TOMRA and Adidas. TOMRA has pioneered solutions for reducing food, mining and metals waste with reverse vending machines that are now used in more than 100 countries. Adidas - one of the world’s best known sports shoe brands - committed itself in 2017 to replace all its polyester inputs to recycled plastics - and by 2024, reported a 96% success rate. Many of Adidas’ most popular shoes today are partly made of plastic that they have taken out of the ocean and repurposed.
Terra Alpha demonstrates how proactively owning and engaging certain companies on value-generating opportunities in both environmental and select social arenas can generate double bottom lines - i.e., improvements for people and planet, as well as market returns for shareholders. Since launching their original, diversified strategy in May of 2015, times and his colleagues have generated +9.1% annualized returns net of fund expenses, before management fees. Doing well while doing good was never going to be easy. At Terra Alpha, under Tim Dunn, hard work and enduring principles seem to have done just that.
