Terra Alpha pioneers investing with the environment in mind

Story and photo by Callie Broaddus

Middleburg is home to some of the country’s most successful innovators and business leaders. Among them ranks a tennis-playing, number-crunching world traveler named Timothy P. Dunn. 

Dunn has lived near Middleburg with his wife, Ellen Stofan — currently NASA’s chief scientist — for 16 years. The couple raised three children on a farm just outside of Middleburg, and they have each dedicated great amounts of time and treasure to preserve the beautiful countryside and town they call home. 

You might recognize Dunn’s name from the boards of various local organizations such as Highland School, which all three of his children attended, the Virginia chapter of The Nature Conservancy, the Piedmont Environmental Council or maybe even from the College of William and Mary’s Board of Visitors. But in the world of finance, he is known as a world-class investor and founder of Middleburg-based Terra Alpha Investments LLC. 

Dunn came from a traditional financial background as senior vice president at Capital Research Global Investors, which manages over $1 trillion in investment funds. He was lead analyst and fund manager of some of the company’s largest and most successful mutual funds. However, in the late 2000s, Dunn became concerned that Capital Research and large investment companies were not accounting for environmental factors that could pose long-term risks to investors and should have an impact on their strategies. 

In hopes of making an impact, he left Capital Research in 2009 and dedicated the next five years to working with several environmental nonprofits. “As I was doing that work, it became clear to me that we really need capital markets — the investment world — to be part of the conversation,” said Dunn, “so I started thinking about how I could combine the two.” 

Dunn founded Terra Alpha in December 2014, and his ideas are already making waves in the investment world. “We very quickly established ourselves as actually being legitimately part of the conversation; we know what we’re doing.” 

Dunn noted that this quarter, Terra Alpha will present work at three global conferences, and one of their reports on measuring water efficiency will soon be published as a chapter in a prestigious sustainable-investment textbook.

So, what’s the big deal? 

Terra Alpha’s investment approach takes into account an extra set of data to create a measurement that Dunn and his team call “environmental productivity.” 

Environmental productivity is quite simple. Companies efficiently using natural resources, compared to their industry peers, will have greater long-term returns. The measurement accounts for the company’s carbon efficiency, water efficiency and material efficiency. 

Regarding companies in Terra Alpha’s global equity fund, “The amount of carbon they use is 90 percent less than the market they compare to,” said Dunn. “These aren’t just new economy companies that don’t otherwise use [fossil fuels]. We have industrial companies and utilities and car manufacturers and so on; these are traditional businesses that are significantly more efficient, which is the whole point.”

Even though the return on investment in efficiency is well understood, many companies have been slow to implement such practices. “These are multiyear benefits. And too often, shareholders are asking for quarterly improvements,” explained Dunn, adding that investors need to spur the conversation. 

“It is in our interest as investors because we’re investing for retirement, for our children’s education, for the next generation. … Most of us, as investors and asset owners, are thinking longer term. And we’re operating longer term. But the people we currently trust to manage our money are often rewarded and are focused on quarterly outcomes rather than annual outcomes.”

Terra Alpha has collected vast amounts of data from companies, big environmental nonprofits, academics and a growing group of environmental data entities. “It’s amazing how few traditional investment firms actually know about the information we’re using,” said Dunn.

“There are a lot of people who are starting to look at their portfolios and their investments based on environmental factors, but there are very few who are actually using the information to create portfolios. … We have the luxury of having started two years ago, when the tools were increasingly available. And if you’re starting from scratch, you design how you invest very differently.”

But Terra Alpha doesn’t just absorb data and invest accordingly. The company dedicates time and resources to advocate for greater transparency among companies to divulge environmental risks and opportunities. They have made strides to demonstrate to money managers that environmental productivity is an opportunity to improve returns and drive capital markets toward an economy more in line with our natural systems. 

“Not just for future generations,” said Dunn, “but so our own generation in future years can continue to prosper and thrive in a way that we’re accustomed to. Because we can choose to just ignore the evidence that we need to shift or we can do it.”

Dunn and his co-workers at Terra Alpha find inspiration in housing their work so close to home. “Given what we do, I think being out in a place that’s so beautiful and so natural is really powerful. When you go out and take a walk through the woods around The Hill School campus, it kind of reminds you of the importance of the natural systems,” Dunn said. 

“I think most of the team would say the best part of the drive out is going up The Plains Road, and they’re surrounded by the kind of things we’re all fighting to preserve — the natural beauty and systems we rely on.” 

Dunn said he and his employees already feel like they’re starting to make a difference. “It’s the ultimate win-win, because the winners are truly all of us.” ML

Terra Alpha Investments: 119 The Plains Rd., Ste. 250, Middleburg, VA 20117; 540-252-5289; terraalphainvestments.com; [email protected].