Photo and editing by KK Ottesen.
Dan Sanborn serves as Director of Research, Portfolio Manager for Terra Alpha’s Concentrated Strategy, and as Head Trader. Dan chairs the Investment Oversight Committee and serves on the firm’s Diversity, Equity and Inclusion Committee, and Management Committee. Prior to joining Terra Alpha in 2015, he held positions at Ned Davis Research Group and hedge fund Vardon Capital Management. Dan holds a BA in Economics from Rollins College and a MS in Finance from University of Florida’s Warrington College of Business. He is a CFA charterholder, a member of the CFA Institute and CFA Society of Washington, DC, and has achieved the CFA UK Certificate in ESG Investing.
What misconceptions do you run into about sustainable investing or Terra Alpha specifically?
One of the elements is, frankly, still a lack of knowledge around sustainable investing. Since we live it day to day, we’re almost in a bubble. Sometimes it’s helpful to take a step back and be like, “This isn’t on top of everyone’s mind.” I have conversations with people like, “Oh, wow, we didn’t even know investment managers do that type of analysis.” And obviously this whole area has just become so politicized. So it becomes more of, “If you’re a Republican, then you don’t believe in this stuff.” Or “If you’re a Democrat, then you overly believe in this stuff.” There’s less of that overseas, but I think there’s still not a recognition that this is investment analysis.
What led you to Terra Alpha in the first place?
I spent the bulk of my career prior to Terra Alpha with an independent financial research company. When it was sold to a publicly traded company there was a culture change, so I was looking for something different, and that’s when I came across a post for a startup fund based out of Middleburg, Virginia. Tim certainly has this contagious passion that very much resonated with me. Helping build a process from the ground up, embedding our philosophy into how we were going to operate from day one, and being able to recruit a team that would share in the vision and be able to have a greater impact was very appealing. And for someone with a data background, having the opportunity to dissect and analyze this environmental information set that was, at the time, frankly very much misunderstood, was intriguing.
Had you given much thought to sustainable investing issues previously?
Yes and no. I’d had some interesting experiences with nature in the past where I grew up, in Staten Island, New York. We lived by the beach surrounded by wetlands and would have to deal with brush fires as a normal thing in life. There were times we would have to evacuate our home, watch the fire trucks come to try to put it out and be like, “I wonder if the house will still be there?” Then in 1992 there was a Nor’easter and the berm wall broke and flooded and we lost everything. Unless you really lived through it, you just don’t fully appreciate the impact of these things. I know there’s a spirituality component for me, personally, being stewards of something that doesn’t belong to us, and with that, helping those that sometimes need help. And while I had always done things like recycle, I had never really thought about using information sets around the environment as part of investment decision-making. That was something that differentiated Terra Alpha and was pretty cutting edge.
What was it like to be on the vanguard of figuring out how to use this information?
It was awesome. We brought in all the data, started trying to build out the investment process itself, analyzed several hundred companies, and then put in the trades to get up and running. Corporate disclosure of this information was like the wild, wild west a little bit where lots of companies were getting in the process of starting to report and disclose information, but maybe they were creating that dataset a little differently depending on the methodology they were using.
One of the first things we recognized in implementing our investment process was: We don’t want to use estimated data when we’re trying to select companies to invest in, because the whole premise is if you measure it, you’re more likely to manage it. There is actual company-reported data that you can get, but then there’s a whole industry that makes money estimating this data. Estimates may serve a role in helping gauge a company’s impact on nature, but not so much for helping select between companies, because there are such nuances in how companies operate. And using this information in a purely quantitative way, in a passive investment approach has severe limitations. Like, if you’re comparing a company that manufactures internally versus one that outsources it, one’s going to look way more intensive than the other. If you’re just doing a passive screen, you’re not going to fully be able to appreciate that. We are more of an active asset manager because there are just so many nuances.
For example, waste measurement tends to be normally based on weight, but sometimes some of the most hazardous waste is actually fairly light. So if you’re looking at quantity of waste, it doesn’t really capture the impact. But, improvements in standardized measurement over the years have been helpful. Or, another example is plastic pollution. Again, it tends to be lighter weight, but can have a meaningful impact, particularly if it’s making its way into the oceans and such. So, one of the evolutions we’ve made in our environmental productivity rating framework that has been substantial is really trying to go through an effort of characterizing a company’s greatest area of impacts on nature. Is it on the emissions front or is it on the water front? Is it on the waste front? Is it on the nature front? And where in its value chain are those impacts? Is it from its own operations? Is it more from the upstream suppliers or the downstream use of their products and services? And then really trying to measure how a company is performing versus that characterization. From not only the risks posed with its impacts on nature, but also the opportunities that come from trying to transition us to a more sustainable economy.
Do you have examples of an impact you hadn’t been able to quantify and then finally figured out how?
I think the big one remains Scope 3 emissions, the emissions that come more from a company’s non-operational elements of its business. So, its supply chain and its product usage. That’s still an issue in terms of the lack of data quality. Trying to get a handle on a company’s Scope 3 emissions is actually one of the pivotal first steps to help us try to get to a net-zero outcome. In the early days, frankly, we did focus more of our efforts on Scope 1 and 2 emissions, more of the operational footprint of companies. A great evolution for us is factoring in Scope 3 even more and really engaging with companies in order to assist them and help provide that positive reinforcement mechanism on the importance of it. So, an important evolution in sustainable investing is that if we don’t get a handle on the Scope 3 emissions problem, then there’s only so much progress we’re going to be able to make. Scope 3 is a key to getting to better Scope 1 and 2 data and to improved thinking around life-cycle impacts.
What is your relationship with the companies in your portfolio?
I would classify us as almost like allies/advocates. We try to applaud progress but recognize at the end of the day we’re still looking for actual outcomes, actual reductions in emissions, the natural reductions in water use and waste generation, and biodiversity impacts. No company’s figured out, I think, the perfect formula to be net positive at this stage. It’s not to say that maybe one day that won’t be achieved, but for now it’s continuing to push in a positive reinforcement mechanism type way for companies to continue to keep their eye on the ball here.
Is there a holy grail – what would you like to see if you could snap your fingers?
Proof of progress and ambitious targets and goals would be a holy grail for us. Ambitious targets that put us on a path to a sustainable economy, but also the information that shows the investments and capital expenditures that are being actually implemented to achieve those targets. And maybe companies being positive advocates at the societal level, maybe even more in the lobbying level, to do their part to help push us. Because at the end of the day, we need a greening of the grid, of the utility grid, for any of this really to be accomplished.
Also a shift in time horizon outlook – CEO average tenures tend to be less than these targets that companies would be setting. So how do you get this reinforcement mechanism in place from a governance and management standpoint that aligns with the timelines that we need to align with in order to actually make real progress?
What would that look like?
I think more of a shift to a broader stakeholder approach. Shareholders would still be key stakeholders in the equity markets, but not the only stakeholders; employees, communities, customers, they’re important pieces of the puzzle as well.
Having been on the ground floor of trying to build the sector, do you have advice for other people interested in the sector about how to be effective?
From a research perspective, it’s this trust-but-verify type mentality. What we do has quantitative components to it, but it’s also fairly qualitative. So there has to be this trust-but-verify mentality, and part of that is continuing to ask questions like “how” and “why” every time you come to a conclusion.
I’ve been very fortunate to love what I do, love the people I get to do it with, and feel like we’re actually making a difference day-to-day. That is a privilege. Being able to take risks, finding other passionate people – I don’t want to even say like-minded, or people that agree with you, because it’s good to be in an environment where there is disagreement; that often leads to some of the greatest innovations. But being around people passionate on the topic is huge; it’s like this whole mission alignment and vision that we’re trying to accomplish together.