Michael Crabb [00:00:00] Welcome to another episode of the Energy Impact Podcast. Our guest today is Tim Dunn, the founder and Chief Investment Officer at Terra Alpha Investments. Tim, great to have you on.

Tim Dunn [00:00:10] Thank you, Michael. It's a pleasure.

Michael Crabb [00:00:13] Before we find out about the portfolio you're building at Terra Alpha, tell us a little bit about yourself. Where are you from?

Tim Dunn [00:00:21] Sure. Well, I'm currently sitting here in Washington, DC, literally about 12 blocks from where I was born at Georgetown University Hospital. There's a lot of journey in between then and now, but I was born in 1961. It was right in the heart of the beginning of a really pretty tragic decade of civil strife, assassinations. And I grew up very much in the Cold War era.

Michael Crabb [00:00:47] Here in DC?

Tim Dunn [00:00:48] Here in DC, the Maryland suburbs of DC.

Michael Crabb [00:00:52] Crazy. And did you have some context of this conflict? You were pretty young.

Tim Dunn [00:00:56] I was pretty young, but my family was very engaged and formed. And The Washington Post would arrive every morning. You'd look at it and see what was on the front page, and sometimes you'd ask questions. And then, I distinctly remember in elementary school going through nuclear attack drills where we'd hide under our wooden desks as the protection against that from happening, from being in danger. Or sometimes, we'd even go down to the basement of the building. So yeah, the idea of a Cold War and nuclear weapons and the Soviets attacking us was very, very real.

Michael Crabb [00:01:42] Fascinating. I mean, you bring it up now, but did that influence what you studied or what you wanted to grow up to be?

Tim Dunn [00:01:49] Absolutely. I ended up going to college at William & Mary, in Virginia, and my intent was to go into the Foreign Service. And I took a lot of classes... It was an International Relations major, I took classes in nuclear treaties. And that's where I was going to go until I realized two things. One, actually, that it took a long time to get from being a little new person in foreign service to where you're sitting across the table and negotiating on nuclear arms treaties.

Tim Dunn [00:02:24] And two, I took a class in finance, global trade and finance my junior year. And all of a sudden, I became someone who was... I grew up in DC; you don't really think about Wall Street and capital markets. And all of a sudden things like the World Bank and the IMF and global banking became something I knew about and heard about. I understood this force that was sort of ignored, largely, in Washington. So that shifted me from focusing on, particularly international relations and Foreign Service into more of the capital markets.

Michael Crabb [00:03:03] Interesting. So it was just one class and you're like, "Hey, I want to do something different." I mean, it feels like there was more there.

Tim Dunn [00:03:10] I have to admit, I probably didn't have a... Junior year in college is when you really start to realize, "Oh, I better actually start thinking about what I'm going to do after college." And Plan A was not looking likely that I was going to go there. So all of a sudden I was like, "Well, this something that seems really interesting."

Tim Dunn [00:03:28] I grew up in a family of lawyers in Washington, DC, with a lot of policy stuff, so it was just really a truly new area for me. And this is in the... Now we're talking early 1980s, which was the jobless recovery. And so, I had really the credentials that would otherwise allow me to be a really potentially successful salesperson for Procter & Gamble or something like that. So, I went right to business school. It really led me to go to business school, and then that led me to other things.

Michael Crabb [00:04:01] Got it. And really targeting finance? Or you said, "Okay, there's this broad world of business that I can explore for a couple of years."

Tim Dunn [00:04:09] I think it was more finance. Not so much working at a company, in a traditional company, but that really evolved while I was in business school because I went to Northeastern University, which I cheerfully refer to as the fifth-best business school in Boston. Still a pretty good business school, but it was in good company. But they use the case study methodology and you just studied companies and what made a company successful. And that to me was really interesting, but I was more in the, "Okay, I want to do this from an observational perspective." So, managing, maybe, and consulting, maybe investment banking, maybe investment management. So that was the way I looked at it. But it was a fascinating transition in my whole understanding of the world, because honestly, most people don't grow up thinking about Harvard case studies and things like that.

Michael Crabb [00:05:04] Interest rate hedging isn't normal dinner conversation.

Tim Dunn [00:05:07] Yeah. I was also probably not the most finance or numbers oriented person. I was more of the the bigger picture strategic thing. But I still did okay in finance and at business school.

Michael Crabb [00:05:19] Yeah, I bet. I bet. And you fit best in that area. Okay, so out of those things, what did you end up doing? How did you transition into the working world?

Tim Dunn [00:05:31] So before I get there, let me do one little sidebar. Northeastern has what's known as the Co-op program, which means that every student at Northeastern, whether you're an undergrad or a grad student, has to do a work stint during their time. And in the business school, they started a recorder system. So basically, you as a student would fill a full-time job at a company for six months and then you'd be replaced by another Northeastern student. And that was a really important experience for me, particularly someone who went right from undergrad to my MBA program.

Tim Dunn [00:06:11] What was kind of interesting and has played back in other ways over my career is that my internship was at a company called the Yankee Atomic Electric Company, which is a nuclear engineering consulting firm. And I worked in the Fuel Cycle department. And the main job was modeling and trying to assess which historic contracts that they had signed for fuel were the worst, so they could figure out which ones to try to get out of. It had been a lesson learned because they'd signed all these contracts in the '70s tied to the price of oil. The price of oil in the early '70s, and then the price of oil went up.

Michael Crabb [00:06:54] For nuclear fuel? They tied it to marginal price. Fascinating.

Tim Dunn [00:07:01] It was absolutely tied to the price of a barrel of oil.

Michael Crabb [00:07:05] Wow, that's crazy.

Tim Dunn [00:07:08] These are 10-year, 20-year contracts.

Michael Crabb [00:07:10] So, yeah, you do lock in cross commodity risk, you're asking for some.... I guess it was before deregulation. Like, there wasn't as much volatility then, right?

Tim Dunn [00:07:21] Well, there was a lot of oil price volatility, but there was not... They were just passing it along to all regulated entities, but it was still kind of egregious. Anyway, that was my experience working at a company that made me think, "You know, I probably want a place that's a little more creative with a little more room to accelerate your growth than working in a company." But it also was another experience around how deals are structured and companies are structured that can really influence your outcomes.

Michael Crabb [00:07:53] Totally. Yeah, fascinating. So you pretty much said, "Okay, no company." So yeah, investment banking, consulting. I mean, that seems like the logical path.

Tim Dunn [00:08:04] Yeah. And then, there's this world of investment management. And I really didn't know much about any of that. So I interviewed in all those areas but increasingly became clear that the one that made the most sense to me... I mean, investment banking, obviously, it's a high-value industry, it's important, but you just kind of go in and do deals and then you move on. In management consulting, you go in and you assess and you make recommendations and then the company either does or doesn't do it, but you go on. And you don't really have that much influence. You don't even really have a sense of satisfaction because they can just totally ignore you.

Tim Dunn [00:08:46] In the investment management business, what I loved about it, and I still do is you do your analysis, you make your best effort to understand the opportunities ahead of a company. And then, you usually put money in, or sometimes you short a company, and you find out whether you're right or not. So, you really do directly benefit from your work, or your clients directly benefit from your work. And that was appealing to me. I also liked the fact that really there was no set of specific rules. You just find the information you think is going to matter, you take that information in, and you hopefully make better decisions than other people.

Michael Crabb [00:09:29] Yeah, active management. We can certainly get into all the theory there. That's a big universe, so where did you start? I mean, were you public equities, you started on the private side?

Tim Dunn [00:09:41] I've always been in public equities. Again, because I was really drawn to big companies that are operating in the same industries and some are more successful. I remember distinctly, for instance, a case study that was about Southwest Airlines. They were a pretty big new startup then, and still operating mostly out of Love Field in Dallas, Texas. Herb Kelleher, the CEO, the founder, had this really basic idea that revolutionized and was the element that made Southwest Airlines what it was. He said, "Hey, why don't we actually make it fun to work for the airline? And then, make it fun for the passengers so that they'll come back."

Tim Dunn [00:10:30] This was the time just after deregulation, where most airlines were just... You know, we're back to that now. It was pretty unpleasant experience and there was very limited friendly service. So that was, to me, a really good example and in a way, a very early sign of a company that understood stakeholders. If your employees are happy, your customers are happy. Now, obviously, Southwest has moved way past those days and they more recently are known for not treating their customers very well, and I think they're paying the price for that. Anyway, that was a good example where I thought, "These big companies are really interesting." And the markets are right there in front of me. You can really tell whether you're right or not.

Tim Dunn [00:11:14] So, I went into public equities. I worked for a bank in Providence, Rhode Island, that at the time was managing about $2 billion in client assets and I was covering a quarter of the S&P 500. I was covering industries from electric utilities to consumer products and bunch of things in media. It was kind of a fire hose of taking on information and learning it. And that was a great couple of years of experience. And then, I worked for a bank in Philadelphia, PNC, for two years, only covering consumer companies, about 15 companies and really digging into understanding a company.

Tim Dunn [00:11:59] Ultimately, I ended up in LA with a firm called Capital Research, which manages the American Funds. At the time, I was about a $60 billion asset manager. I worked my way as an analyst and as a portfolio manager there. And during the time I was at Capital, the firm grew from $60 billion to $1.2 trillion. I ended up managing money in three of the firm's biggest funds, which were Growth Fund of America, Capital World Growth and Income Fund, and Euro-Pacific Growth Fund.

Michael Crabb [00:12:37] Wow. You had geographies and industries. That's a wide mandate.

Tim Dunn [00:12:42] Yeah. Well, obviously, as a portfolio manager, you have a team of analysts. I mean, Capital has hundreds of analysts, and they're feeding you their ideas. And so, it's a much different role, but you're ultimately making the decision of what goes into the portfolio or not and still subject to, whether you're doing it well or not. But it is a very different role. And certainly at active management firms like Capital, the analyst role versus the portfolio manager role. At other firms like hedge funds, they could be pretty much the same thing. But it's a little different.

Michael Crabb [00:13:19] Yeah, I find it quite challenging just as part of my career to sort of... I always felt like when you're doing the math and you're doing the analysis and you really understood the company, you had more conviction in actually making the decision. And then, when you are having to sift through, second hand, all of these different analyses, it's quite challenging.

Tim Dunn [00:13:40] Yeah. No, there's a real pride in being able to really know that you know more about the company than almost anyone else. If you've been doing it, you understand the industry. And then, as a portfolio manager, you're in that curse of sort of being a little more inch deep and mile wide kind of thing.

Michael Crabb [00:13:56] Yeah, with real, real-time feedback on performance. Fascinating. Okay, well, bring us then to today with Terra Alpha and how that came about. Because it wasn't totally clear to me, is it still public equities or are you doing some private work as well? How did that come about? What's the scope? Tell us about the company.

Tim Dunn [00:14:20] Yeah, so let me get you caught up to what's happened since, because I left Capital in 2009. And the reason I left Capital in 2009 was I was increasingly recognizing the role that my role and the capital markets role had in some of the global sustainability challenges. I mean, that seems self-evident for many people. Certainly at the time, it was less self-evident. And obviously, it was sort of a catalyzing event in my career. I was in Hong Kong at a conference and Al Gore did a personal presentation for about 30 of us on his Inconvenient Truth. It just sort of crystallized what was brooding in my head anyway around the role of corporates in contributing to some of these problems, and therefore, the investors in those corporates had to take some responsibility. And I should side note that my wife of 39 years is a planetary geologist, so it's not like I didn't have a resource I could turn to and say, "So what is going on about this whole climate thing?"

Michael Crabb [00:15:27] Yeah, you had some inside baseball.

Tim Dunn [00:15:29] Yeah. So I left Capital, and I really went and worked with nonprofits, environmental organizations like The Nature Conservancy, like The Sierra Club, like Carbon Disclosure Project, which is the biggest repository of corporate carbon information. And I really spent a lot of time trying to help those nonprofits do a better job of interacting with investors and companies around understanding the role they play in the environmental challenges and helping them have more information so they can actually do a better job or reduce their negative impacts. Because we have an economy, a society that's detrimental to our planet's natural resources, but we can and should and need to transition to be less detrimental so that we get back to sustainability. We all understand that. Most of us understand that.

Tim Dunn [00:16:27] That ultimately led me to what was five years of really intellectual learning and thinking. Ultimately, I came back to the conclusion that the biggest impact I could have is being back in this big force called the capital markets, but doing it in a way that really deeply integrated the impacts that the company that might be in the portfolio is having on those key natural resources. So, that led to the creation of Terra Alpha. Originally as sort of a demonstration tool, now it's more of just a living, breathing, active manager of public equities on behalf of our clients.

Tim Dunn [00:17:09] At its core, the reason Terra Alpha exists is to help enable a sustainable planet for society. Our way of doing that is through the capital markets, both as a direct investor and also leading by example, that you can actually approach investing in a slightly modified way than has been traditional. Traditionally has been, as you know, ignoring what is belovedly by some called externalities, the impact on the environment and society as though there is no such thing or it is not the responsibility of public companies or any company. And changing that narrative and saying, "In fact, that may have been true. You could have gotten away with that, but the reality is that the cost of that is going to keep getting higher. And so, you're better to get ahead of it, manage it better, and be part of the solution rather than part of the problem."

Tim Dunn [00:18:06] And that just makes for a good business decision, right? I mean, if you're trying to grow a business long-term, you are better off being aware of all the ways that your business impacts other companies, other markets, other resources, and how those might alter the cost for the company, whether it's direct costs or indirect costs. So, being a smart company in the 21st century requires a more holistic look at those issues. And we think the same is true for an investment management firm. A smart investment management firm in the 21st century considers those factors. Exactly what they do with that information is up to them, but that's the premise.

Tim Dunn [00:18:48] So at Terra Alpha, our whole philosophy is to allocate capital to companies that are profitably leading a transition to a truly sustainable economy. And we view profitable in that we want to find companies that have a path to actual, real profits and cash flow, and truly sustainable meaning one that operates within the natural resource boundaries of our planet and serves the actual needs of society.

Michael Crabb [00:19:23] Amazing. Okay, so a bunch of different questions, I guess, but I want to go down this line. I think you hit two sides of the coin that I generally hear from folks with similar types of mandates. And I should give you kudos for being one of the earliest firms. I think in 2015, 2014, you were probably a little bit of the lone duck in the room.

Tim Dunn [00:19:51] We were a little ahead of the curve. Gave us some time to get ready.

Michael Crabb [00:19:51] Yeah, today I think you're in good company. So, yeah, kudos to you for being ahead of that curve. But yeah, there's like the risk mitigation part, which you discussed, right? If you don't consider externalities, you're ignoring large potential liabilities that may not be liabilities today. So I think that's one good, just sort of fundamental rationale. And the other side is always, "Well, we think they are positioned to outperform either based on future pricing of competitors liabilities and or consumer behavior." And I think you basically said both of those things, which makes complete sense. But talk to me a little bit about how you evaluate. I mean, those are both quite subjective metrics, I think. How do you boil that down into the broader analysis of an underlying company?

Tim Dunn [00:20:47] Yeah, well, one at a time. There's a lot of fundamental research that goes into this. There is a perception out that it's a very data intensive approach, and if you just have all the data, you can just get these simple answers. That's a misconception out there, often, that you can just create a quantitative strategy and address this. At it's core, the reason that can't happen is most of what you really need to know is what's going to happen in the future.

Michael Crabb [00:21:23] Totally, totally.

Tim Dunn [00:21:24] What is that company planning to do? As you said, what are their competitors going to do? What's going to happen? Where is the economy going? And all the data in the world doesn't tell you anything about the future.

Tim Dunn [00:21:36] So, what we try to do is a couple of things. One is, we use our sort of broad thematic frameworks to identify companies we think might be of interest and do deep analysis around that company to determine if that's correct. And so, the broader thematic is, at its core, there are some certain things that are just happening in the world. New technology, new capacity with semiconductors, new information sources, more proliferation of information and data mining, and all the other things. That's just happening, right? Demographics are happening.

Tim Dunn [00:22:15] And then, there are things that are happening or are likely to happen to allow us to become more sustainable. So things like the electrification of everything. At the same time, decarbonizing. At the same time, changing food systems so that they're no longer as negatively impacting on soil and forests and land use. Those things are all things that must develop if we're going to actually manage to have a sustainable planet with 10 billion people on it.

Tim Dunn [00:22:47] So we look at all those factors and say, "Okay, that's where the economy almost inevitably needs to go over the next... Who knows exactly how long? Five, ten, twenty years. And does this company look like they will either benefit from those changes or they're actually leading those changes?" Each of which is interesting. One being more of a climate solutions or sustainability solutions company and others just being enablers of that, or beneficiaries. And we come back to what that means.

Tim Dunn [00:23:22] That's a look that says, "This looks like a kind of company, strategy, and business area that would be interesting. So let's really figure out if it looks that way or if it actually is that way." And we have two different frameworks we use for considering the fundamentals of any company we're investing in. They both are looking pretty far ahead in the future. One is, and our core differentiator is what we call environmental productivity. And that is really how a company uses and impacts key natural resources for the planet.

Tim Dunn [00:23:58] And it really starts with a characterization of the company. Is it a high carbon intensity company? Is it a high water use company? Does it have have a supply chain that's in agriculture? Where does it have the biggest impact on natural resources? And then, we dive in a little bit more to those areas, particularly to figure out if there's something they can do, significantly, to reduce those impacts. In some industries, it's just really hard to change that, and in others, it's much simpler.

Tim Dunn [00:24:30] And then, we look at all aspects of that from the ones that are quantitative, that give you a sense of where the path of travel so far has been. But then, the bulk of the work is on what their plans are, their intentionality in those plans, where their product development efforts are going, and what will look like progress. And so, we're tracking that and constantly tracking that.

Tim Dunn [00:24:56] Then the other is what we call our Enduring Business Model, which looks at a five plus year time horizon to understand the business strategy, the financials, the operational resources required to execute on those, and the governance and management. And all that is really to help us identify how likely is this company, independent of the environment productivity... Because they're looked at separately, but then later combined... Is likely to thrive given where the world's going?

Tim Dunn [00:25:29] So, here's an example. Trane Technologies is in our portfolio. And that's not a big deal to say on a podcast. It is a company that is both benefiting, effectively, from the impacts of climate change and also playing a role in enabling their customers to limit the negative effects of climate change through their technology. So, it's just an inevitable thing. There's certainly certain things we know. It's going to get hotter and more humid, on average, across the planet. It's a pretty straightforward proposition.

Tim Dunn [00:26:08] We also own sporting equipment companies that happen to have always made clothing that always does really well in hotter, more humid environments called gyms and on athletes. They are, effectively, beneficiaries of these trends. Not only that, but also towards more casual clothing and more involvement in sports. There are a lot of different subtleties to each of these.

Tim Dunn [00:26:34] Ultimately, what we end up with is a portfolio of companies, each of which have their own reasons for being in the end the portfolio, because we really believe they have a very good fundamental outlook as a business and they're also meeting our minimum threshold for having enough of a focus on environmental productivity that we think they're going to be more likely to be part of the solution than furthering the problem.

Michael Crabb [00:27:03] The cynic in me hears some of those examples. You're betting on both sides of the equation a little bit, right? I mean, if it benefits from a world getting warmer... If we solve the world getting warmer, which I will admit is a big lift... We're talking trillions of dollars in 30 years. Maybe the question is how do you think about portfolio allocation between those two silos, companies that benefit from climate change and sort of the impacts, I'll call it climate adaptation, versus climate change, sort of direct enablers?

Tim Dunn [00:27:57] Well, what we don't want to be doing is just investing in a portfolio of beneficiaries, the worst of it. But unfortunately, I think the science is pretty clear that if we don't address climate change and significantly reduce the embedded impacts that we're already facing... It's not like... The changes are happening now.

Michael Crabb [00:28:20] Totally. If we went net zero tomorrow, it would still get hotter.

Tim Dunn [00:28:26] It would still get hotter. So, we've already baked that in. And so, adaptation is a part of it, but not without significantly trying to reduce the worst potential impacts. That's why environmental productivity is a necessary but not sufficient condition for us to invest. So the company has to actually understand their role. They have to be not just selling something that benefits, but they have to be making sure that product is reducing its own impact as much as possible.

Tim Dunn [00:28:55] So for a sporting equipment company, that means using less oil, virgin plastic, which is created with oil, in your production of your products. And so, less polyesters and less plastic in shoes and so on. You've got to be doing that while you're still selling... And you're not going to be a good investment if you're not actually selling more stuff next year than you sold this year. That's kind of a necessary part. But obviously, if we don't significantly lower the future implications of climate change, that's bad for all companies. It's really bad for everyone. I mean, no one benefits. Well, I mean, very few people or companies benefit from that.

Tim Dunn [00:29:42] You're right; there is both an adaptation mitigation, and those companies that are much more in the pioneering sector, which we would view as a Vestas or a Tesla, where they significantly alter. They are truly changing the way our economy functions and the kind of things we do in a meaningful way. There just aren't that many of those in the public equities arena. There's a lot of interesting companies. They tend to be the private equity, growth equity, venture capital. And as we've seen over the last couple of years, those that went public a little early still haven't yet proven out the profitability side, which is why we use that screen. I mean, we've got to have a path to actually being financially viable as a business to invest. So, there are a few of those, and we would love to have more of those in the public sector, but over the last 10 years, there's been plenty of capital in the private and venture capital world.

Michael Crabb [00:30:49] Yeah, that's what I think is so interesting. Yeah, I appreciate the comments you made a few questions ago around all of this data. It's still very messy, and at times, subjective, right? But at the end of the day, it is still often cheaper to ignore pricing negative externalities because of the way markets function, right? There must be some inherent conflict. I think we're seeing that with some of those public companies, or the ones that were private that SPACed or IPOed early and didn't hit their revenue targets or their sales targets or whatever KPIs they were priced on.

Michael Crabb [00:31:28] I don't know. Fundamentally, it feels like if we really want to make the impact that we need, we have to start... We can't like arbitrarily or altruistically price those externalities. They have to actually be priced, because you will never disconnect from the core fundamentals of the business. You're just adding another... Maybe it's even a margin or it's even a multiple or whatever your normal financial metrics are, you're just adding a host of other analyses.

Tim Dunn [00:32:04] I think that's right. I mean, since we started, one of our core impact focuses was that we needed to see all companies measure and report on their key environmental impacts. So, greenhouse gas emissions, Scope 1 and 2, and now 3. Their water use in a number of different metrics because just how much volume of water you use is not really necessarily a great measure. You've got how much you also discharge and what the quality of that water is you're discharging. So, water quality is really important. And then also, water risk. You know, what exposure you have to too much or too little water. And the same with waste streams. Because with waste streams, ultimately it comes back to being how much excessive raw materials you're using. And in a society where there's limited availability of those, those things all become more and more expensive.

Tim Dunn [00:33:01] It truly is an externality if you have no way of measuring how a company is actually impacting those resources. And then secondly, if you don't have some way of comparing that information across companies. So we've always been advocates for greater disclosure and of greater transparency. In many cases, literally, companies didn't have a rolled up analysis of this information. Obviously, they would have it at a facility level, but they didn't have that information and they certainly didn't want to share it with anyone because they knew that suddenly people would say, "Hey, wait a minute. How come you use so much more water than this company?" Companies don't like that, but they respond to it. So, what you measure, you manage, right?

Tim Dunn [00:33:46] So, that is a key part of it. And now we're starting to see more regulatory change. We're seeing more pricing of these resources, whether it's water pricing as utilities come in and are privatizing water and they realize that the only way to make sure there's enough water is by having a higher price. Or whether it's insurance pricing that's trying to price some of these risks. Internal carbon pricing is happening and starting to influence capital allocation of companies. And then increasingly, particularly through the EU, you're starting to see a lot more rules about mandatory decision making, disclosure and action around changing products and so on. You'll be required to do this whether you want to do it or not. And that's creating more of a level field, broadly, for all those who are operating on the same basis. And for those who are operating with a lag, obviously not leading that process, they're going to have a harder time catching up.

Tim Dunn [00:34:49] Our original thesis was that if we could identify companies that are leaders, even if they're nowhere near where we need to be, they are in a better position to continue to be leaders as the cost of inaction starts to close on cost of action. And we've seen that a lot with technologies developing that really make cost of action a lot less. And the other thing that's starting to happen more is your license to operate being pulled if you don't change your operations. And that's the ultimate cost.

Tim Dunn [00:35:25] I think there are many metrics, and I think most companies today knew this was all coming and they were doing some of the work anyway. But now, it's being thrown at them from every direction. And I'm sympathetic to leading a big multinational and trying to address not just the environmental issues, but many of the other issues they're facing. But there are companies who have been doing this more effectively for a long time, and they're a lot less stressed.

Michael Crabb [00:35:55] Yeah, that's really well said. I haven't heard that articulated so clearly as part of other conversations. That's a real gem for this. That's quite well said.

Michael Crabb [00:36:12] I would be curious... You talk about license to operate. Is there any commentary in your experience covering consumer goods or perhaps other commodity-like goods that become less commoditized because of consumer behavior associated with some of this reporting? I think that is actually a bigger driver. My thesis is that is driving real change faster than regulatory changes is able to keep up.

Tim Dunn [00:36:42] Well, I think one one example I can point to that was... I guess it was a comparison. But we were talking about sporting goods. One of the companies in the portfolio is Adidas. And Adidas was not necessarily a leader on sustainability, but they found their way into it in an indirect way. And we've been investors in Adidas for eight years.

Tim Dunn [00:37:13] I think it was in 2015, they had decided to launch a niche brand product using recaptured ocean plastics. And they made a million pairs of the shoes. They manufactured a million. They sold out in months, $200 a pair. And then, the next year they said, "Okay, well, that worked. Let's sell some more. Five million." Sold those out. And then 11. And they finally came to an "aha" moment like, "Wait a minute, this is really helping us grow market share. Customers are giving us... This is starting to create a halo." They started doing more, putting that material into actual shirts. And they've committed to eliminating virgin plastic in their shoes across all 450 pairs of shoes they make.

[00:38:10] So, I mean, this was an example where I don't think they necessarily thought it was going to go where they started when they started, but it clearly differentiated their brand in a way. Now, they've had other issues that we don't need to get into, but that was indirectly within their key market of sports shoes and apparel that has made a big difference to that company.

Tim Dunn [00:38:35] So yeah, I think there are examples. I mean, I would also point to when Microsoft announced their big initiative to go net zero and then eliminate all the emissions from their entire corporate history, that helped them grow market share in cloud computing. Very clearly. And with the data now, I think the stock was up 8%.

Michael Crabb [00:38:57] I would argue that the data center world has done more to decarbonize than the aggregate amount of carbon taxes, globally. I mean, they're huge power purchasers. They're driving privatized markets. I love both of those examples in very different spheres. But it's that sort of... What was once a commodity is no longer a commodity. And I think it had to happen a bit by accident.

Michael Crabb [00:39:26] I mean, you've done the case study. Can you imagine someone pitching to an investment committee, "Hey, we're going to pay 2X cost to make this carbon-free and charge people 3X the cost." They would laugh you out of the room, right? But once you sell a million and then you sell five and then you sell twenty. That to me is where I am most hopeful. And then regulatory processes, I think, will just sort of catch up to the realities. They'll hit the stragglers then, which should be quite interesting.

Tim Dunn [00:39:57] There's no doubt. I mean, I remember years ago we were talking to a Swiss insurance company. They were early in the process of understanding that they were not going to be able to hire attractive talent if they didn't have a true sustainability strategy. And they knew it because the number one place that people were going to their website was there sustainability page. And the bulk of the people on their website were future prospective employees, and they were drafting that information. That's a hidden benefit, right? They were going to able to outcompete other Swiss employers because they had a real story.

Tim Dunn [00:40:46] Customers have been a little slower because it's more complicated. And then, investors have been the slowest to pay attention, to ask questions. And that's the other thing is starting to happen is there's no doubt that as companies are getting better at communicating what they're doing in an authentic way around these issues, investors are willing to give them the benefit of the doubt on that. And they're definitely getting feedback from investors.

Michael Crabb [00:41:13] Yeah. And you were just eight, ten years ahead of that curve.

Tim Dunn [00:41:19] Oh, I don't mind being ahead.

Michael Crabb [00:41:21] Yeah, it's awesome. I'm sure it was a slog starting out. I'm sure it feels pretty cool to start to see those tides turn. Maybe with a little bit of the time we have left, tell us what your predictions are for the future. How does the platform evolve? How do the companies evolve? What are you most excited about looking forward?

Tim Dunn [00:41:44] I want to do one thing first. I want to mention our commitment to net zero.

Michael Crabb [00:41:50] Oh, yeah. Great. Perfect.

Tim Dunn [00:41:51] It won't take long. To us first and foremost, the main component of our environmental approach to the analysis was around the elephant in the room, which was climate change. Water is a close second, but climate is the number one thing. And so, we started out really trying to understand a company's carbon intensity and doing a lot with that data. And that data, ten years ago, eight years ago was really, really messy and much more limited than today, and it's fantastic that that's improved.

Tim Dunn [00:42:25] So, we were already looking at best in class with the peer group for carbon emissions for companies eight years ago. So when the net zero initiative came along, it was sort of just, effectively, putting a brand or a label around what we've been doing. Ad we'd already been pushing for energy science-based targets, and so it gave us an opportunity to put that into something that fit in with the narrative of the day, which was a net zero goal.

Tim Dunn [00:42:58] And so we have set... We're signatures to the Net Zero Asset Manager Initiative, which means we have to do a couple of things. One, we have to set commitment to what our targets are in that commitment, and then we have to report regularly on progress using key CFD-aligned framework. And so, we've committed to 100% of the assets we manage on behalf of others, which is all of our assets, to the science-based target aligned, 75% science-based target aligned by 2025 and 95% by 2030, which is significantly ahead of the 2040 goals.

Tim Dunn [00:43:36] And what that means is that of the dollars invested in the portfolio, 75% will be in companies that have validated science-based targets. And we're currently just under 70%, which is significantly ahead of where others are. And it just reflects that was how we were investing already. And the reason it's important, though, is that it allows investors to better understand how their asset manager seriously and intentionally takes this effort.

Tim Dunn [00:44:08] And importantly, of course, our investors are not looking for concessionary returns; they still expects us to beat the market. And we have. I think I can say that. We've had superior returns than our benchmark over the lifetime of the strategy. But we take this very seriously, and it also keeps us focused on moving our companies towards that. So when we started this commitment, we were only at 41% coverage in the portfolio. So we've been mostly moving companies in the portfolio to commit to science-based targets.

Tim Dunn [00:44:45] Now, the big thing that needs to happen now is not just having a commitment to a science-based target and having it validated by the third party, it's actually to have a plan with dollars to spend on how much it's going to cost you and how that's going to affect your returns so that you can start implementing that. So, it's an actual net zero transition plan as opposed to just a commitment. That's what we're focused on. Enough about science based targets, but we think it's a really useful tool to embolden companies and prod companies to get more serious about this issue.

Michael Crabb [00:45:18] Yeah. I'm glad you brought that up, because I do think there's a little bit of this world where sustainability is what the local government says it is. And so, my hope is we'll continue to get more refined as a society around how we talk about things and exemptions and other things that just sort of cut the initiative off at the knees sometimes. It's like, "Yeah, why do this and then do that?" It's some silly things.

Tim Dunn [00:45:48] So, as to the forecast for the future. I mean, I forecast success of companies, I don't really necessarily forecast exactly what the market's going to do. We do believe that inevitably we will transition to a decarbonized economy. Probably not quite on the ideal timeline that we would like, but progress is being made, and that is exciting.

Tim Dunn [00:46:13] Most people who listen to this podcast probably know about Carbon Tracker Initiative and see their data they put, and a lot of other organizations like yours, I'm sure. The amount of money going into these technologies that bring down the cost curve, whether it's in EVs or whether it's in the power gen area, is all pretty exciting. But we're also all nervous as heck about the timeline to generating power in place and then getting the grid connected and getting the power to the right places. So, there are a lot of unknowns. But I think to the smartest minds, I think it shows that it's doable.

Tim Dunn [00:46:54] And I'm an optimist. I mean, if you're focused on the environment and long-term only public investing, you better be an optimist or you're in the wrong job. So, I do think there's a path to still getting within under two degrees. Obviously, we're not going to stay under one and a half, so that's why we do have to adapt and mitigate, and we have to mitigate and adapt. We will have lots of migration, we'll have lots of change, but I think we can still get to a place where we can sustainably live on this planet.

Michael Crabb [00:47:33] Amazing. What a great optimistic note. I really appreciate your time. Super excited for others to hear all the intelligent things you had to say.

Tim Dunn [00:47:44] Thank you, Michael. It was a real joy.