Helping Donors Learn the Climate Investing ABCs
The newest report from the UN’s IPCC Working Group, released in late February 2022, has issued a dire call to action for the global community regarding climate change. The report states that the planet has already warmed by 1.1 degrees C, and that the widespread disruption of climate change is showing in every region around the world. Drought, floods, and extreme heat are exacerbating issues like water and food insecurity, wildfires, diseases, and ecosystem destruction. If we want to mitigate the worst effects, we need to limit global warming to 1.5 degrees C—which means globally, we need to significantly decrease emissions by 2030. That’s a mere eight years from now. Based on this data, it’s clear that the planet needs us, and we’re running out of time.
As individuals, it is hard to grasp what we alone can do to help tackle the enormity of the challenge that lies ahead. The tools any one person has—such as buying local produce, installing solar panels and recycling—can only make a significant difference when performed by millions or billions of people.
But as donors and investors we have a bigger, and arguably more effective, tool at our disposal: charitable capital. Philanthropists who use donor-advised funds (DAFs) have a special opportunity to guide their dollars towards funding climate solutions. That money can then be granted out of the DAF to nonprofit organizations working in the same area, potentially multiplying the impact of the dollars. Currently, only about 3% of all U.S. charitable donations go toward environmental causes. It’s likely an even smaller percentage of that number is specifically dedicated to climate change mitigation, as the category contains a broad definition of environmental and animal-welfare related work. In the broad investment landscape, the average yearly investment in climate is $632 billion—which sounds like a big number until you compare it to what we need each year to hit our targets: $4.13 trillion. That’s a $3.5 billion gap. If we want to seriously address the climate crisis, these numbers need to grow significantly.
Charitable capital is an ideal source of potential funding for a new wave of social entrepreneurs and fund managers who are currently seeking money to build renewable energy grids, restore critical ecosystems, develop technology to pull carbon out of the air, and address the social inequities that a changing climate may exacerbate.
Here at CapShift, we’re in the business of helping individuals and families incorporate impact investments into their charitable portfolios. Climate-focused investments are made with the intention to mitigate climate change, build resiliency to the effects of climate change, and position a portfolio to protect against climate risks and take advantage of climate opportunities.
In working with DAF providers and donors who are committed to investing in climate solutions, we’ve identified three common approaches they can build into their portfolios, which we call the ABCs of climate investing.
- Align. A common starting point for many individuals and families is to integrate climate goals into their liquid, diversified, publicly traded portfolios. It includes strategies such as divesting from fossil fuel companies, investing in companies with thoughtful and measurable climate practices, and/or engaging with portfolio companies to advocate for environmental policies. Opportunities that move the needle in this category include climate-focused shareholder engagement and new green bond issuances.
- Build. Donors and Investors can also develop, build, and deploy climate solutions directly through private investments targeting market-rate returns. These solutions span asset classes and impact areas, ranging from climate-resilient infrastructure to agriculture technology to sustainable forestry.
- Catalyze. Finally, the most impact-minded donors and investors can recommend solutions that otherwise would not be broadly supported by return-maximizing investors. These investments tend to feature higher risks or lower returns than the market can bear, and include solutions such as loans to climate refugees, pre-seed clean technology innovations and clean water infrastructure.
These strategies can be incorporated independently or they can work in concert to form a 100% climate-aligned portfolio tailored to meet an individual or families’ unique goals. We recently published a climate investing primer, which includes more details on this framework and how families can use it to start their climate investing journey today.
We have an immense opportunity to use the charitable assets invested in DAFs to help turn the tide on the climate crisis. CapShift and NPT are aligned and ready to help donors meet the urgency of the moment. You can read more about NPT’s impact pools and get started with climate-based impact investing here.
CapShift partners with National Philanthropic Trust to help donors align their donor advised funds’ investments with their values to create meaningful impact from the moment capital is donated until it reaches their preferred nonprofit.
About the Author
Jesse Simmons helps lead the investment research team and advisory practice at CapShift. Jesse previously served as Senior Investment Analyst and Impact Advisor at Align Impact, where he managed due diligence on private investments and helped clients discover and act on these opportunities. Jesse began his career at the World Bank, where he focused on development effectiveness in Sub-Saharan Africa, and subsequently worked at Dalberg Global Development Advisors, a mission driven consulting firm bringing innovation to development. Jesse has a Master of International Business from The Fletcher School at Tufts University with a focus on finance and econometric impact evaluation.
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