Tim Dunn is Founder and Chief Investment Officer at Terra Alpha, where he designed and oversees the firm’s investment processes and funds. Previously at Capital Group Companies, one of the largest active investment management firms in the world, Tim was a lead portfolio manager of some of the firm’s largest and most successful funds. He has served on the boards of various environmental and civic organizations, and currently serves as the Vice Chair of the PATH Foundation, on the Virginia Board of The Nature Conservancy, and as a member of the Global Leadership Council at the World Resources Institute.
You started out with an international relations focus – how did you then migrate towards the work you do now in sustainable investing, or as a “climate crisis investor”? I really like that term.
I definitely grew up as a Cold War kid. I vividly remember practicing hiding underneath the desk in Potomac Elementary School in case of nuclear war. And so I thought I should be out there in the world dealing with that. So I studied nuclear arms treaties in college and thought I would go into the Foreign Service.
But I took a class in the second semester of my junior year about international trade and finance. And it was, like, Whoa. I thought foreign service and diplomacy was really important but seeing how these big financial institutions work and these intergovernmental banks, and the movement of money and how it influences things, was really powerful. It was an introduction to the idea that financial markets kind of drive everything – for better or worse. So I went to business school and then the investment business, because I was interested in analyzing companies. And a lot of it, frankly, in hindsight, was around understanding that companies that actually thought about more than just meeting short-term bottom-line profit, were actually better companies, and actually better for society.
And when did you start thinking about climate change?
I am married to a planetary geologist. Literally, on our second date (in 1981) she explained to me how Venus has a runaway greenhouse gas effect on it. Because the greenhouse gases are trapped in the atmosphere, and it’s, like, 700 degrees Fahrenheit on the surface of the planet. And it didn’t used to be. Kind of saying that that analogy plays out in any planetary system that has an atmosphere. And if you create too much of a gas, and it gets trapped, then it becomes a problem.
Honestly, this long-term environmental threat to life on this planet has always been in the back of my mind. And the fact that the finance system that I worked in, and the power of it, was creating this economic growth, with a growing population, growing opportunity, yes, and growing wealth. But, with it, growing impact on the environment. It was sort of, like, we did too well, without realizing or recognizing the impacts of what we were doing. And we passed a tipping point where we were using and impacting natural resources on the planet above and beyond its annual ability to absorb that, which is called the regenerative capacity.
So in the early 2000s, a group of us were talking about it within the firm I was working at, Capital Group, which still is one of the largest active equity investment management firms in the world, about climate change and about how we could think about how companies might be potentially liable for the impacts they’re having. Particularly utilities and oil and gas companies and coal companies who had high levels of responsibility for carbon emissions. It was, frankly, a little bit of a whispering in the hallways, almost. Like, This is a problem. Do you share this concern? Oh, yeah, I do too. We were all in London. And I specifically remember going back to L.A. – because the firm is based in L.A. – and talking about it. And was told in no uncertain terms that this is a political issue.
Even then?
Even then. That we weren’t going to go down this path because it’s not what our investors have asked us to do, and why are we talking about this. It’s a political issue, and we should just drop it. We made some progress, but we hit a lot of walls, both internally and also, frankly, in terms of really getting fact-based information that you could actually put into a process. And I got to the point where I was reflecting on the fact that I had been incredibly fortunate in my career at this firm; it had done very well, and I had done very well. But I was kind of faced with, I can either keep doing this and keep contributing to the problem, or I could choose a different path. David Brooks once wrote about the ‘tombstone test,’ you know: what are you going to be known for? And so I wrote a letter to my colleagues, and I said, I’m leaving, and I’m going to focus on climate change. I’m leaving the investment business because I think it’s flawed and there’s no obvious solutions within the investment space.
What was the reaction?
Good luck, Tim. [Laughs.] In hindsight, I’ve met others who went through a similar kind of evolution, thought process, in roughly the same period of time. It may correspond a little bit with how well the financial markets had done. People had made a lot of money, so they can afford to kind of make these decisions. But I think a lot of it was a coming together of circumstances that made it clear, if you really step back, that this was an existential crisis that had to be addressed. Or else.
Was there any catalyzing event that really made clear the existential crisis so that you just thought, I’ve got to just jump in?
So I wouldn’t say there was an immediate aha moment. But, it was clearly not going to happen within even a relatively long-term-oriented, thoughtful firm like Capital. There were many smart people who totally understood the issue but didn’t see it as something relevant to their work. And that really hit home. That even thoughtful, global thinking, self-aware people can just say, Well, that’s too bad, but it’s not my problem. I don’t really live that way. And I’ve never lived that way. I mean, obviously, go back to thinking I could solve the Cold War in the Foreign Service. You know, to me, if you see a problem, you want to try to fix it.
Where did that come from? Is your family like that?
My father was someone who was always active in the community. He was a lawyer by trade, but very involved in community politics and also very involved in protecting civil liberties. So I think he definitely instilled in us, look – it can be as small as the kitchen’s a mess, clean it up, to there’s a problem in the community, go out and do something about it. So I’ve kind of always grown up with this attitude of: Try to make things a little bit better than you found them, right?
So then you left this career that you’d been very successful in for many years. What was your path to setting up Terra Alpha?
Probably the most powerful thing that happened on the way out the door is I got invited to a Sierra Club event where they were highlighting the Carbon Disclosure Project [CDP] that was started by five Oxford grads to get companies to disclose how much carbon they’re emitting. I mean, this is what we were looking for when I was at Capital. They had developed, at this point, by far the most robust amount of financial information and data around companies and their carbon emissions. So that you could use information, in theory, to better understand a company’s impact on the environment, and therefore, make more informed decisions about investing. Which was completely out of line with how the investment world works, which is: if it doesn’t have a clear impact on the bottom line of what that company’s going to earn today, I don’t care about it. But companies have impacts on the environment, society – we all have impacts. And if we don’t recognize those and do something about them, we’re creating the problems. So it was at that point that I started thinking maybe there’s a way to contribute to fixing the financial system.
You know, I’ve tried to get other people to do it; they’re not doing it. And, if I can prove that you can actually invest this way, and it’s successful, then that’s a great demonstration model. And people love – in financial markets, they love to copy something that’s working.
When you first spoke with Capital about it, they said, Oh, that’s a political issue. We’re not touching it. Why do you think it’s that way, and is there a way to claim it as a nonpartisan, human issue?
It’s gone through some really interesting iterations. Even in the investment business, in the first couple years [of Terra Alpha], we made a conscious decision to not say “climate change” in any of our materials. Because it just created an unnecessary distraction. What we really focused on was environmental risks and challenges. You know, everyone’s for clean air, fresh, clean water, forests, healthy soil, clean oceans. No one’s against that. No one wants to be a contributor to that problem. So you didn’t need to say, “climate change” or “global warming.” You just had to say we’re trying to reduce the amount of air pollution. It’s the same thing. I mean, one causes the other.
And how did you figure out how to make money doing this and make it an investment that people could not just feel like they’re just giving their money away?
I’d say that’s still a raging debate in the investment business right now. As to whether the purpose of this is to do good, do well, or do both, or do neither. And frankly, there’s all of those. Because there are many who say that this is all greenwashing and that companies are just saying they’re going to do these things, and in fact, it just gives them more license to do things anyway.
I’ve had people come to me: Will you just tell me you’ll never invest in a company that pollutes? You know, I can’t tell you that because every company pollutes. The question is, how much pollution can they reasonably create that is as part of the system that is aligned with our actual plant’s regenerative capability? And that’s what the Paris Agreement is all about, is to create an economy that holds emissions down to a level that keeps the global temperature from going up more than 1.5 degrees centigrade. It’s not about fixing it, as making it less bad, to a point where it’s sustainable.
So we don’t turn into Venus.
Right. So, it is very doable. And we know how to do it. It’s just – it will cost some money, but it’ll save us so much money in the long run. But it’s a question of whether we’re willing to spend the money to do it now. Because it does cost money upfront. I mean, whether it’s for a company or for you and I. I mean, you go out and buy an electric car, and it costs a little bit more upfront.
What do you see as the biggest impediment to actually getting there? Is it that people aren’t willing to make the sacrifices, aren’t fully educated about the better options out there, or just a lack of understanding of what the true costs are and how that’s going to come back and hit us tomorrow?
You know, I think, ultimately, it’s a kind of insidious reality of the current system working really well financially for the people who are in charge. So, right now, the biggest problem is the system works, in many ways: It’s creating wealth for people, it’s creating economic activity, it’s creating jobs. But it’s also creating all these other problems. And people view change as challenging that.
There’s nothing wrong with J.P. Morgan making money. Or any other bank or any other person. But it cannot continue to be without regard to the longer-term impacts on environment and society. And change does come at a cost. And so we’re going to need regulatory change
If you could put your finger on the scale in some way, what would make the biggest impact?
I would change the accounting system so that companies have to incorporate the cost of their impact and use of environmental resources and their impact on society. And it’s pretty straightforward. I mean, we don’t account for human capital or environmental impacts in financial reporting, it’s just absent. It’s just been left out. And it’s the flaw in the system that’s allowed for all this to happen.
You started doing this when few other people were doing this and now it’s a much more crowded field.
And you have the Calverts and you have a group of Boston-based asset managers. But combined, I mean, even to this day, you take all the major firms that truly do active and integration, environmental, social, governance factors in their investment process, up until two years ago, I’d say they managed less money combined than I managed personally at Capital when I was there 10 years ago. So they were tiny.
Well, you managed a lot, though, at Capital.
Yeah, it was $26 billion, which is great. But that’s in the context of a financial system, which is tens of trillions. It’s gotten a little bit better. But it’s really hard. Because a lot of firms have an ESG product. All that means is they say they consider ESG factors. You have no idea what that really means, and there’s no real evidence that they actually truly do the kind of assessments that they should be doing. But right now, they’re seeing it as an opportunity for raising some money in funds. So you have a lot of new funds that are being launched that say “ESG” on them but there’s a big difference between saying you’re an ESG fund and actually doing it.
Have you had periods of real doubt?
I’m an optimist at heart. I mean, you better be if you think you’re going to start out fixing the Cold War and now think you can help solve the climate. And if you’re an environmentalist, you better be an optimist because otherwise you couldn’t get up every day and do something about it. So, I guess my attitude is I’ll keep going until I’m not here anymore. And as long as we’re doing a good, credible job, and we’re moving forward, I feel good about it. You know, there’s days where you’re, like, Gosh, why is it so hard for a university investment committee to say: “well, we’re investing in the long-run interests of our community and the school and the future of the world, and our money needs to be aligned with that.”
I’ll also tell you, there are a lot of major companies actually changing how they operate. And that gives me optimism. You know, there’s plenty in the world to always be seeing how things are going wrong. But I really do get up every day and think, What we’re doing is great. I really am proud of it. The team is amazing. So passionate. And I think we’re making a difference.
Terra Alpha Voices highlights thought leaders who inform our investment process and impact work. This series, created in partnership with author and photographer KK Ottesen, seeks to shed light on the subjects’ diverse perspectives rather than their illustrious careers.