How Funders Are Using the Power of Their Investments to Impact Climate Change

Typically, foundation grantmaking pales in comparison to what’s needed to hit global climate targets. This is a crucial moment for funders to use the power of their investments—and more are doing just that. Here’s a roundup of what funders have been up to.

By law, American foundations must give away 5 percent of their assets annually, and they cling to that number all too often—so for all the good charitable giving may accomplish, funders are lounging atop some $715 billion in combined assets

Granted, endowments are there for a reason. But when you consider the profound impacts of climate change unfolding in front of us, and the time-urgent nature of this crisis, it becomes harder to justify locking up those funds. Another problem is that foundation endowments are all too often invested in companies undermining their own climate-related grantmaking.

We’ve been writing regularly about how foundations and donors alike need to do far more to beat the ticking clock of climate change, previously floating a proposal to dip deeper into their reserves to increase grantmaking on the subject. 

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But there’s a whole set of tactics foundations are increasingly embracing to leverage more of their money toward progress on climate change, falling under terms like "mission investing," "responsible investing," and "impact investing." The way foundations use these terms is all over the place, and there are multiple strategies (Confluence Philanthropy has a pretty painless overview and collection of terms). For simplicity, I won’t parse the practices too much here, and I use the term “impact investing” broadly to describe using investments to achieve social impact.  

This is powerful for foundations, because it frees up far more money for social purposes. It breaks down the barrier that says endowments exist to make money, and charitable giving (all 5 percent of it in many cases) exists to advance the mission. 

This isn’t a new concept, nor is it unique. But it is spreading, and it's in the spotlight lately in relation to climate change. In particular, the Paris Climate Agreement was a wakeup call about the amounts of money that needs to shift to achieve global climate change mitigation goals. One estimate put that number at $16.5 trillion in efficiency and low-carbon energy investments through 2030 to hold temperature increases within the 2 degree celsius limit.  

In response, more environmental funders are looking to use their own sizable assets to invest in clean energy and sustainable development, and ultimately to attract the much larger necessary private investments to climate solutions.

Impact Investment’s Momentum

To give some idea of how common these practices are, a recent survey of 186 U.S. foundations found that about 24 percent have implemented at least one of four types of what it calls “responsible investment practices”—encompassing positive and negative screening of stocks, impact investment and divestment in fossil fuels. A third have either implemented such practices or are considering do so. 

But there’s still a lot of hesitation, and most adopters are really only dipping their toes into the water. The survey suggests that many respondents were still fairly baffled by the concept, and cited substantial or moderate impediments like concerns about performance and finding a manager who can handle such investments. A 2015 report by the Center for Effective Philanthropy found the percentage of foundations’ endowments used for impact investment was still very low, with the median at just 2 percent.  

It’s possible that some of that hesitation will be alleviated by new guidance from the Obama administration that attempts to clear the way for mission-related investments, where the IRS has not weighed in before. And while the dollar amounts are still relatively small, climate funders are making notable steps. 

For example, the Kresge Foundation in 2015 committed to making $350 million in investments by 2020 that will advance the foundation’s mission, which would be 10 percent of its assets. Kresge’s a big funder of climate change mitigation and resilience, with a focus on poverty and American cities. "This solidifies the notion that we, as a foundation, cannot solve complex social programs through traditional grantmaking alone,” President Rip Rapson said in the announcement. 

Midwestern climate funder the McKnight Foundation made a similar 10 percent commitment in 2014, initially setting aside $200 million toward impact investing. The funder has placed another $100 million into a fund that is weighted in favor of companies with low carbon emissions.  

Other large funders currently backing climate solutions are trailblazers in this area, like Packard, which, since 1980, has made more than 250 investments totaling $750 million that support its mission. It currently sets aside up to $180 million of its endowment for mission investing—a lot of money, although still less than 3 percent of its $6.7 billion. The Rockefeller Foundation is another leader in the field (see below).

Smaller funders have also taken strong stances. Wallace Global Fund, for example, which has led the charge for foundations to divest from fossil fuel stocks, also sets aside 10 percent of its endowment for “high-impact investments” that include climate change solutions. Rockefeller Brothers Fund just adopted its own mission-aligned investing strategy, and recently announced a $10 million investment in a company expanding clean energy in Africa. 

Philanthropy’s Role in Global Climate Finance

A big reason impact investing is especially relevant to climate change right now is the current focus on the necessary global investments in energy efficiency and renewable energy, prompted by commitments of the Paris Climate Agreement. 

It’s clear that the world needs to shift trillions to sustainable development and renewable energy. Even the entirety of the U.S. philanthropic sector’s assets aren’t enough, nor are governments’, for that matter. So foundations are figuring out how to use their assets to attract larger private investments by scaling up markets and proving the value of certain investments.

The Rockefeller Foundation is an innovator here, and in a recent interview with Yale’s Clean Energy Finance Forum, Lorenzo Bernasconi, Rockefeller’s senior associate director of innovative finance and impact investing, gives a rundown of the foundation’s approach to climate finance. The funder basically makes itself a guinea pig to prove new areas and methods of investment. 

Given the scale of the challenge and political momentum generated by the Paris Agreement, quite a lot of our portfolio is climate-focused.… We fortunately already have a broad set of proven [technology] solutions that we know to be effective and cost-efficient. The challenge is about finding the right financing solutions or business models to incentivize large-scale investment into them so that they are widely adopted and scaled up.

Rockefeller has made millions in grants to advance the overall impact investing field, and one of its major impact investing initiatives is to expand renewable energy in rural India. 

India is a huge focus of investment in climate solutions. The biggest recent news on this front came with the announcement in June that four major funders—Packard, MacArthur, Hewlett, and Grantham foundations—offered $30 million to be matched by the Indian government for climate finance efforts. The seed investment supports two projects meant to prime the pump for other investors, intended to leverage another $1.4 billion, an example of using foundation and government assets to unlock larger sums.

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Rockefeller Brothers Fund Breaks From its Fossil Fuel Origins

The Rockefeller Brothers Fund, separate from the Rockefeller Foundation and operating on a smaller scale, has nonetheless become a breakout star in using its investments for climate solutions. In April, the foundation made headlines with the announcement that it would join the fossil fuel divestment campaign, a symbolic victory given its origins in wealth derived from Standard Oil. 

But it’s gone further since, adopting in June a suite of mission-aligned investment policies: “Given the enormous and complex challenges facing today’s increasingly interdependent world and the breadth of the fund’s programmatic priorities, leveraging the remaining 95 percent of the portfolio in strategic ways to support the fund’s mission is essential.”

The funder is not only divesting, it’s also using positive screening, or looking for stocks with positive impacts beyond returns. And it’s pursuing investments that advance its mission. This year, RBF extended its impact investments target with 20 percent of its assets. That allocation has hit $98 million as of June. The fund’s latest move was a $10 million investment in Mainstream Renewable Power to expand renewable energy in Africa.  

Where Should Foundations Put Their Money? 

Those are just a few examples of what funders are doing, and many are still struggling with advancing their missions through investments. Foundation staff and trustees aren’t venture capitalists, after all. Fortunately, there are many resources out there, like Confluence Philanthropy and Mission Investors Exchange

The latest tool is a new report commissioned by Packard, MacArthur and ClimateWorks to identify promising areas for climate-related impact investment. The resulting suggestions are quite specific, recommending four distinct areas where foundations might find success: 

Stopping deforestation and peat loss in Indonesia: Indonesia is currently clearing huge swaths of land to make room for palm oil agriculture. Investors can fund farmers to become more sustainable and improve production, preventing deforestation and making farms more valuable in the process. 

Related:Who Knew? A Prize Takes Aim at an Obscure But Critical Environmental Challenge

Rolling out distributed generation in India: Back to India—there’s a ton of opportunity to invest in more access to renewable energy, helping entrepreneurs get the ball rolling and expanding electricity to millions who need it. 

Clean tech investments: Government funding for energy research can lead to private capital investment once technology is proven. But there’s a “Valley of Death” in between. Foundations can invest in companies trying to close the gap, when other investors might be scared off. 

Scale energy efficiency: Improving efficiency saves money and reduces emissions. But it can cost a lot up front, an estimated $330 billion gap in capital needed to stay within a 2 degree temperature rise.

There are other ideas, like scaling projects in China and supporting growth of carbon markets, and the report’s explicitly intended as a starting point, noting that much more leadership and coordination are required across this still immature field.

One of the best pieces of advice it offers is a theme that comes up a lot in impact investing—selecting strategies that complement grantmaking. For example, a foundation could invest in energy efficiency to show what’s possible financially, while making grants to improve government policy on the issue. It’s that combination of investment and program that can really shake things up, more than either one can individually. 

In fact, one of the most exciting things about impact investing is the wide range of possibilities it offers across a spectrum of risk and impact. 

Foundations may not have the sheer firepower of governments or financial institutions, but there’s a vibrant set of ways they can break out of the 5 percent cage and use their full financial power. If they do, philanthropy could become a much bigger force in solving the defining problem of our time.