Foundations Sharpen Their Focus on Climate Change Investing & Impact Measurement is Key

Supported by Impax Asset Management

 

The Woodwell Climate Research Center has received significant funding for its work from charitable foundations like the Gordon and Betty Moore Foundation over the years. The foundation has given the center, formerly known as the Woods Hole Research Center, more than $20 million over the past two decades, for programs like studying thawing Arctic permafrost and supporting low-emission land use policies in the Amazon.

Moore isn’t alone: many other foundations have long provided grant money to a wide range of recipients to research and fight climate change. Far less common has been foundations using their investment portfolios to invest in companies dedicated to climate change mitigation and adaptation technologies and strategies.

That’s very much changing, though, as foundations in recent years have been pouring investment dollars — not just grants — into these efforts. And they’re finding more and more such investment opportunities as traditional asset managers and private equity shops are also paying more attention to the space.

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“I think there’s a real shift going on,” says Matthew Nordan, managing director of the $50 million Prime Impact Fund, a climate change-focused investment vehicle that counts many top charitable foundations as its investors. “Past climate change investments that we saw by foundations were primarily focused on energy access or on conservation as it relates to climate. I think now the focus is shifting to technology development and deployment, and from straight grants (with no expectation of returns) to mission-related and program-related investments.”

Among the 70-plus investors in the Prime Impact Fund is the John D. and Catherine T. MacArthur Foundation. The Prime investment is part of the foundation’s $500 million impact investment portfolio.

“Our catalytic capital seeks to fill significant gaps left by the conventional marketplace, driving financing to organizations, enterprises, and initiatives that advance the goals of the foundation’s programmatic strategies,” says John Balbach, MacArthur’s director of impact investments.

Another foundation with a sharp focus on climate investments across its entire portfolio is the Nathan Cummings Foundation. “Investing in solutions to climate change is core to our mission, and we think that all businesses can act in ways that can either harm the planet or contribute to climate change solutions,” says vice president of finance Bob Bancroft. “For that reason, we apply a climate lens to all our investments, not just a subset.”

Where the Money is Going

Among the companies that Cummings invests in is a European online retailer that “implements rigorous sustainability policies and practices to reduce carbon intensity, waste, and pollution,” he says. “Another is a technology platform that supports companies to deliver leftover food — after corporate events, for example — to food insecure households, thereby reducing waste.”

Cummings also invests in funds and companies that are working to solve the climate crisis directly. Recent examples include a $6 million commitment to a private equity fund focused on best-in-class sustainable agriculture practices, and a $1.5 million investment in a battery storage company, to help reduce reliance on fossil fuel power generation.

At the Doris Duke Charitable Foundation, its climate change-focused grants inspired the organization’s investment team to look into similar investments. Since then, “We’ve made investments in climate-focused infrastructure, sustainable land management opportunities, and global equity strategies that lean into companies that are moving the needle for decarbonization,” says Jennifer Katz, the foundation’s director of impact investments. Much of that has come through venture capital investments, she adds.

Besides Prime, MacArthur’s portfolio includes an allocation to Terra Silva Investments. In this, MacArthur paired with the David and Lucile Packard Foundation to provide catalytic debt which helped to “enable support for a small group of emerging fund managers pursuing sustainable land use in and around tropical forests,” Balbach says.

The foundations’ capital “helps to build a meaningful track record for these emerging managers, and channels capital to this difficult-to-reach, but deeply climate-relevant, sector,” he adds.

MacArthur has also invested in Encourage Solar Finance, a $60 million private equity fund that works to scale up commercial rooftop solar across India. “MacArthur’s anchor investment into Encourage was part of a broader effort with other philanthropic partners that sought to accelerate the deployment of rooftop and off-grid solar in India,” Balbach says, noting that solar is a key part of India reaching its emissions reductions goals.

As for Prime itself, the fund looks to invest in start-ups that offer both additionality and “gigaton-scale climate impact,” Nordan says. Portfolio companies include Liliac Solutions, which is working to improve ways to extract lithium, and Charm Industrial, which works on carbon sequestration and green hydrogen.

About Asset Managers

Fund managers are finding more foundations interested in climate solutions, and they’re also finding more places to invest those institutional dollars. “There is a robust opportunity set to consider because the market is responding to the growth potential in this space,” Katz notes. “Economies around the world are grappling with the major changes that will be required to keep climate change under control, and there is a real need for more innovation and more investment.”

Managers, too, are pivoting toward climate change investments. “A lot of venture capital funds that advertised themselves as things like ‘materials’ or ‘deep tech’ funds a few years ago are now carrying impact language,” Nordan says. “If the tide was all the way out on what we now call climate tech investing five years ago, it is very much back in now.”

Impax Asset Management has been making climate-focused investments for years, and its climate-solutions portfolios have exposure to a broad range of assets. Those include “industrial companies that provide equipment to make buildings more climate‑friendly; companies in the electric vehicle value chain; companies that are facilitating the migration to cloud computing; and those that provide the components needed to rebuild water infrastructures,” says Chris Bole, Impax director for business development and client service.

Impax is seeing investor interest in “companies that benefit from cost-efficient technologies that are aiding the transition to a more sustainable economy,” Bole says. Investors can find such opportunities in both equities and fixed income, and in public markets as well as “through clean energy private equity investments or renewable energy exposure in assets such as wind, solar, and hydro,” he says.

Measuring Climate Change Investments

Foundations aren’t just looking for investment returns with their climate investments, though. As with their grants, they want to know what kind of positive impact their investment dollars are having.

“Impact measurement and management, or IMM, has become a frequent element in conversations with our foundation partners and those new to us,” Nordan notes. “Impact-oriented funders want to see the receipts.”

To assist in finding those receipts, Prime Coalition — the parent organization of the Prime Impact Fund — has developed a resource called Carbon Reduction Assessment of New Enterprises, or CRANE. It’s an online, open-source software tool that helps determine the carbon impact of early-stage companies and technologies.

Prime Coalition paired with several other organizations to develop it, including Clean Energy Trust and Project Drawdown. Funding came from a variety of sources including a grant from the MacArthur foundation. It now has more than 1,500 users, Nordan says, with enhancements on the way. “We’re working with a few other aligned entities to take the principles embodied in CRANE to the next level and introduce some level of shared principles and standards for climate impact measurement across the field,” he says.

Specific investors also have their own methods to measure impact. “We follow the principles of the Impact Management Project and look to the specific outcomes and contributions of each investment,” Balbach says.

For example, for its investment in Terra Silver, MacArthur looks at how much land is being sustainably managed, and how much CO2 has been sequestered; with Encourage Solar, the foundation looks at installed rooftop solar capacity and estimated CO2 emissions reductions.

Cummings, too, considers a range of factors when assessing its investments. “Because we believe this transition will look different depending on the industry, asset class, and scale of each investment, we do not rely on a single metric,” Bancroft says. “Instead, we look at third-party research to understand the greatest impact on the environment within each industry.” Factors the foundation looks at include raw materials usage, carbon emissions, and land use and soil depletion, depending on the specific investment.

Driving this new focus by foundations on climate change is, in part, a growing awareness across the board that we’re in a climate emergency. And things like the 45Q tax credit for carbon capture have had some impact too. But it’s hard to deny that simply swapping the Trump administration for the Biden administration has had a huge impact on the space.

“I think, at a macro level, the change in administration and the correspondingly higher emphasis on green infrastructure buildout has had a massive effect,” Nordan says.

Impax’s Bole agrees. “The Biden administration has certainly brought with it active support for climate change solutions and sustainable infrastructure,” he says, pointing to the US rejoining the Paris Agreement, the pending infrastructure spending bill, and the Leaders to Leaders Summit on Climate that President Biden convened in April. “It is part of an emerging global consensus that we must transition to a low‑carbon economy at a dramatically accelerated pace.”

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