Articles & Insights

From Jacob Hampton – Senior Research Analyst

Recognizing how public equity managers create impact.

As I reflect on the past five years since I joined Terra Alpha Investments, I can’t help but notice how much I have developed as a person. One specific area of development that I am proud of is how far I have come in my own personal journey towards appreciating the impact that can be created by investments in general, and public equity investments in particular.

To be frank, generating a positive impact on the world was not the primary reason that I was first drawn to Terra Alpha. At the time, I wasn’t even sure to what extent impact creation was possible when investing via public equities. This statement may come as a surprise to readers, especially those who know our associates well, because it certainty represents a minority sentiment within our firm, and it is a debate that has waned over time.

I joined Terra Alpha in 2015, shortly after completing a master of business administration (MBA) program. As I surveyed the landscape of potential post-graduate employers and went through interviews with other investment firms, I was disappointed to see investment strategies that were outdated, had lackluster returns, and seemed to invest in the same companies where large swaths of the industry had crowded its trades. 

I chose to join Terra Alpha after extensive research led me to recognize that the firm’s purposed investment strategy was highly differentiated from anything else in the marketplace. I realized that the firm stood to capitalize on a new wave of “non-financial” corporate data disclosure that could revolutionize the way that investment decisions would be made in the future. The plan was to use data that was environmental in nature to help identify and invest in publicly-traded companies that were global leaders in their environmental efforts. The hypothesis in its most basic form was that companies that were good for the planet would also be good for returns

The consideration of “non-financial” data when making investment decisions has roots going back, at the very least, to decades before Terra Alpha was formed. However, in 2015, the specific way, and the extent to which Terra Alpha was planning to utilize this evolving data represented a giant leap into the future. As a result, I was excited about the challenge that navigating this uncharted territory would present. Still, I was much more focused on Terra Alpha’s compelling investment strategy than I was on any potential positive impacts that such a strategy might generate. 

This leads me to the main point that I want to make and is the answer to a question we receive periodically: “Can public equities managers create impact?” As a confessed impact skeptic, I can say firsthand that public equity managers such as Terra Alpha can indeed generate impact, and those that are highly intentional in their actions, can create significant positive impact on the world.       

The two main methods by which impact is generated when investing in public equities are through engagement and through market-based mechanisms. The first is rather easy to understand, though the second may be less obvious. 

Engagement at Terra Alpha is undertaken by our team to help improve practices. This includes engagement with regulators, other investment firms, think-tanks, universities, NGOs, and most commonly, large corporations. Primarily, we engage with corporations that we currently own in our portfolios, ones we are considering owning but may require additional information from, or ones that are notable leaders in a specific sector. These companies are global, multi-national organizations and typically have mid- to large-sized market capitalizations. By dialoguing with corporate leaders, and motivating the underlying companies to improve practices across a variety of areas, we are using our voice as investors to facilitate change on a massive scale. In addition, we vote our proxies in line with our values. While some argue that having impact means taking a more hands-on approach, such as investing in a project that brings fresh water to a remote village, I counter that improving the behaviors of large organizations with complex global footprints is both more scalable, and has a greater net impact on society.

Market mechanisms are also an important component of the impact equation. Even the simple act of buying a share of stock has an underlying impact. When you go out into the marketplace and buy at the prevailing price, you are placing upward pressure on the price of that stock. Given that most corporate executives’ long term-incentive plans include both company stock grants and are derived (at least in part) from share price performance, you are ultimately rewarding the behavior of the company that the executives are directing via monetary incentives. Your buy order is essentially your “vote” in support of the company’s behaviors and practices. At Terra Alpha, we are long-term investors and both our continued buying, and holding of our portfolio company’s shares of stock represents our confidence that the underlying companies are both sound investments, and ones that will generate a positive impact on our planet.       

In the end, we are all at different phases of understanding the impact that our investments have on the world. Prospective investors in Terra Alpha might be interested in the strong returns that have been earned over the last five years, they might be interested in the positive impact that has been generated, or perhaps both. Regardless of what your primary motivator is, the important thing to acknowledge is that how you invest your money does matter. When you choose highly intentional strategies like those from Terra Alpha, the strong returns you earn are paired with significant positive impacts that are ultimately building a better world for all to enjoy.