In this moment of great social, economic, and ecological upheaval, it is abundantly clear that we need fundamental and systemic changes to our economy. Fifty years of Milton Friedman’s doctrine of shareholder primacy and maximisation of profit has produced grotesque inequality and catastrophic environmental impacts. In this economic model, financial institutions and corporations are accountable only to their investors. Because this has become standard practice, investments are one of the most significant levers available to enact social change, influence corporate behaviour, and transform businesses practices to place the common good alongside financial returns.
As movements all around the world rise to demand economic, racial, gender, and climate justice, they are increasingly turning to finance as a way to shift corporate practices and build new economic models in service of a just and sustainable planet. Furthermore, as legislative windows for bold systemic change on climate and the economy seem set to remain narrow in the U.S., foundations have a unique opportunity to drive change globally by deploying our investments alongside our grants to support movements, advance sustainability and human rights, and leverage our assets to build new standards and changes in economic systems. Many foundations have realised that they do not need to sacrifice returns to multiply impact and as a result are deploying their investments as another tool in service of their mission.
Your investments signal your values
Over the past decade – and with increasing urgency – many foundations (including ours) have come to view the way we invest our endowments as one of the most direct ways to advance our values and priorities, a strategic tool that is equal to our grantmaking. We believe we have both mission-level obligation and opportunity to seek impact across all of our tools – grants, operations, and investments. We also recognise that as mission-driven institutions, we are not any investor and should not approach our investments like a mainstream financial institution. Foundations receive charitable tax status to serve the public good. Our investments should neither undercut the public good nor be ignorant of their societal impact. Return maximisation, therefore, cannot be our only objective. If it is, we are mirroring the failed economic system that has driven the very societal ills we exist to address.
The bottom line is this: if we divest and invest, we are supporting the proven strategies of the global climate movement while preserving our capital, helping to save our planet, and remaining consistent with our missions and mandate to serve the public good.
Rather than focusing solely on shareholder value, we must also consider stakeholder value – the wider social and environmental impact our investments have on humanity and its future. Such an acknowledgement requires us to have a theory of change for our investments that assesses societal and environmental impact in a method similar to how we evaluate our own grants. Further, it recognises that investments can uniquely drive solutions to the very global problems we ask our grantees to solve by bringing finance to innovation, scaling solutions, and building new economic opportunity in communities where it is needed most.
We need to recognise that the assets we own drive social value – negative or positive – and determine whether they align with our own. As asset owners, we can demand that the corporations we invest in uphold environmental and human rights standards and walk away if they refuse, withdrawing our capital – divesting – for higher impact elsewhere. By doing so, we can scale system-level change in corporate and financial behaviour, helping shape a new stakeholder-centred economy in the process.
By aligning our investments with both our missions and our societal mandate, we are ultimately signalling our values, not seeking attention for virtuous action. It is the first step in a much broader, but necessary, process of system-wide changes required to reconstruct our global economic system and prevent immeasurable human suffering and ecological devastation.
Movements are calling on us to divest from fossil fuels and invest in climate solutions – and it turns out to be a smart strategy for the climate and for our bottom line. Nowhere is this responsibility to act more urgent than in addressing climate change, environmental justice, and a just transition from a fossil-fuel-based economy for extractive workers. With climate disruption already destroying communities and disrupting life support systems across the globe, there is an absolute moral imperative to do everything we can to not add fuel to the fire. If you own fossil fuels, you own climate change. Moreover, as part of our own fiduciary duties, we have an obligation to address financial risks that companies and financial institutions failing to address systemic climate risk in their business models pose to our portfolios. Investing in just, clean, renewable technologies and sectors, coupled with divesting from harmful industries like fossil fuels and engaging as an active asset owner to secure environmental, sustainability, and justice actions from other companies, is the way forward.
For decades, philanthropy’s response to climate change involved pouring tens of millions of grant dollars into climate research, advocacy, and public relations efforts, while efforts to secure a global climate agreement failed and efforts to enact legislative policy in the United States were repeatedly blocked. Young people observing this vicious cycle decided it was time to target the industry blocking the progress: fossil fuels. Inspired by South African Apartheid-era divestment campaigns, they began calling on their universities to get out of fossil fuel companies and realign their investments. The call spread quickly, and since the Divest-Invest movement began a little more than a decade ago, more than $14 trillion in assets under management have been divested from fossil fuels by foundations, universities, pension funds, and asset managers – with a considerable portion of those funds redirected towards investments in sustainable, ethical, and renewable solutions. Most recently, The University of Cambridge, one of the oldest and most well-endowed universities in the world, announced that they are divesting their £3.5 billion endowment and changing their own investment model to comply with new ethical standards. In their words, climate change poses ‘an urgent existential threat, with severe risks to humankind and all other life on Earth.’
By divesting and investing, foundations are being responsive to the very first and youth-led global climate movement. More than 200 philanthropic commitments to divest/invest have been a direct response to the demands of leading climate activists and movements. Most recently, Greta Thunberg and other young activists demanded at the World Economic Forum that ‘all companies, banks, institutions, and governments immediately and completely divest from fossil fuels.’ Philanthropy has a duty and obligation to listen to those working to achieve systemic change, not ignore or dismiss their demands as we tell them which strategies are better for their advocacy and our own bottom lines.
Moreover, we should listen to them because their strategies are working. The fossil fuel industry is fighting for its survival and the carbon bubble is already beginning to burst. The fossil energy sector is the lowest-performing financial sector of the last six years and losses continue to mount. Royal Dutch Shell wrote off $4.7 billion dollars in the second quarter of this year; Total SE wrote down $7 billion dollars in July. ExxonMobil warned in August that low energy prices might wipe 20 per cent of its reserves off the books. According to many of the coal, oil, and gas companies who have cited its impact in earnings reports, the divest/invest movement is more than partially responsible for the death spiral and crippling losses. Financial experts and researchers are increasingly united in reaching similar conclusions. A new Carbon Tracker study finds that the fossil fuel industry could lose $25 trillion dollars in the aftermath of Covid-19 – a seismic drop in value that they are unlikely to ever recover. Meanwhile, renewable technology has hit cost parity and is on a dramatic upwards adoption curve.
The time is now, and decades-old excuses are wearing thin in the light of demonstrable evidence. By not investing to scale climate solutions, we are leaving critical money on the table that can accelerate this historic transition faster and mitigate greater losses of life, livelihood, and biodiversity.
The crash is yet to come. As global concerns mount about the increasingly short period of time left to stave off irreversible and catastrophic climate change, governments will take more active approaches to regulating carbon, leaving existing fossil energy reserves unburnable and stranded. The industry will not and cannot – for the sake of the planet – recover. If you have not done so already, the time to get out of fossil fuels is right now. The bottom line is this: if we divest and invest, we are supporting the proven strategies of the global climate movement while preserving our capital, helping to save our planet, and remaining consistent with our missions and mandate to serve the public good.
Restructuring your investments is also profitable
While it is clear that philanthropy has both a responsibility and a societal mandate to answer the call of the movements we serve while making sure our investments do not harm their communities, there is yet another reason to divest from harmful industries and invest instead in renewable sectors, community-led innovations, and sustainable technologies: it makes underlying financial sense and upholds fiduciary duty.
Wallace Global Fund first began divesting from fossil fuels and investing in climate solutions ten years ago, followed not long after by the Sierra Club Foundation when its board of directors made a formal commitment in 2013 to completely divest from fossil fuels and invest in companies promoting climate and clean energy solutions. Since then, we have exceeded our financial benchmarks, delivered even greater returns than if we had not divested, and made profits in companies and funds building the pathway to the new green energy economy. We are not alone. A study from the Croatan Institute examining a subset of nearly 200 organisations who joined Divest/Invest reported that every single one of them met or exceeded their risk/return profiles over the last five years. A growing body of literature substantiates Croatan’s findings; experts agree that divesting from fossil fuels will have either no negative benefit for portfolios or will provide better returns than foundations would have gotten had they never divested at all. There is literally nothing left to lose – and everything to gain.
For those foundations arguing that divesting would limit their universe of profitable, high-yield funds to invest in, the exact opposite may soon be true. The impending collapse of the fossil fuel sector means that any well-performing fund either is or should already be divesting itself of fossil fuels to avoid devastating losses, negative shareholder returns, and failure of their fiduciary duty. They have all been warned of the risks in their portfolios and should recognise the clear data of outperformance by fossil-free funds. Meanwhile, foundations like ours are experiencing record, perpetuity-friendly returns in funds completely divested of fossil fuels. It is incomprehensible why, in the face of mounting evidence of moral, economic, and ecological obligation, our peers still decide to remain in funds invested in climate change-fuelling fossil fuels. Their investments are making problems worse and that – even more fundamentally – are underperforming today and may soon burn out altogether. The time is now, and decades-old excuses are wearing thin in the light of demonstrable evidence. By not investing to scale climate solutions, we are leaving critical money on the table that can accelerate this historic transition faster and mitigate greater losses of life, livelihood, and biodiversity.
Investing in sustainable solutions serves every program focus, because safeguarding the planet benefits all of its inhabitants
Philanthropy has a unique opportunity to not only generate financial value from investing in climate solutions, but to also achieve mission-level impacts by helping build a new energy economy that incorporates social and environmental value as well. We are not just any investors, so we should not only seek financial value by investing in large scale renewables but prioritise a just and inclusive energy transition, as well. We should be looking for opportunities to invest in companies, programmes, and movements that help bring everyone along into the new energy economy. We could invest in sustainable energy for the billion people without access to energy today, leapfrogging fossil fuel infrastructure while meeting one of the most critical United Nations Sustainable Development Goals (SDG 7) at the same time. We could partner with Indigenous communities to fuel economic development by investing in solar and wind farms that are locally owned and managed. We could address the social and economic impacts of the declining fossil energy sector by driving just transitions for fossil fuel workers, funding training and placement into new, quality jobs in clean energy-related sectors. As part of economic and ecological rebalancing projects, we could also invest in agroecology solutions, including community-led restorative agriculture, expanding local food systems, and investing directly in local economies.
It is intellectually dishonest – and, frankly, a dereliction of our societal duty – to see ourselves as a grantmaker on one side and an unconnected investment house on the other. The two parts are, in fact, one whole.
As countries around the world develop massive recovery plans to ‘build back better’, private investors can look for innovative ways to invest in projects that centre climate, racial, and economic justice alongside mass job creation. In the United States, philanthropy can support the call for a Green New Deal by putting a percentage of our investments into revolving green loan funds, community investment funds, or new local ownership models for renewable energy. Globally, it could mean investing directly in funds led by women and people of colour that provide economic empowerment while directly addressing environmental issues faced by their communities. All and more of these ideas and strategies are accomplishable at scale with bold and innovative investments that divest from the problems and invest instead in responsive, forward-looking solutions, creating the pathway to a new economy.
Changing how we invest can help build a new economy that works for all
It is intellectually dishonest – and, frankly, a dereliction of our societal duty – to see ourselves as a grantmaker on one side and an unconnected investment house on the other. The two parts are, in fact, one whole. They cannot and should not be governed by different values and rules. Both our programmes and our investments must be vetted according to our mandate to serve the public good. Our investments should not drive the problems we ask our grantees to solve, nor should we leave valuable money on the table that could scale solutions in service of our environment or our communities. To pretend that our investments have no impact on our mission is patently false.
To respond to the challenges of the world we inhabit today, in which financial and corporate actors have disproportionate power, our investments are an increasingly important lever for change. We need a new theory of change to advance our mission that actively embraces our investments as a tool to be deployed in tandem with our grants. To do so opens up greater power and influence. In order to build a more equitable and sustainable world that works for everyone, not just the privileged few, we must move beyond the idea of maximising short term financial returns. Instead, we must pivot towards generating equitable, fair returns that centre human rights, social justice, and equity while ensuring the long-term sustainability of both our institutions and the planet. We should also work to ensure that communities most impacted by climate change, pollution, and injustice have a voice in determining the flow of private and public financing.
We know what we must do in order to ensure this new theory of change becomes the norm. The question is whether we, as a sector and a planet, will do so in time. With each new natural disaster, record-hot year, pandemic, or economic collapse, the failure of our current system is clear. Philanthropy has a unique role to play. Just like it is time for a new economic model, it is time for a new model of philanthropy where we are accountable for our impacts – from our operational practices, our grants, and our investments – and accountable to our stakeholders. In doing so, we will embody the values of a new economy while we help create it. Our two foundations believe that the compounding crises the world faces today are so urgent, there can be no business as usual for philanthropy. By aligning our investments and encouraging others to do the same, we are not ‘virtue signalling’, but rather being responsive and adaptive. We ask you to join us in deploying all of your assets in service of the public good, not simply to respond to some new philanthropic fad but instead to do everything in our collective power to respond to the climate emergency by building a new, just, stakeholder-centred economy right now. We can, and we must.
Ellen Dorsey is Executive Director of Wallace Global Fund.
Dan Chu is Executive Director of the Sierra Club Foundation.
For more on investments, check out the September 2020 issue of Alliance magazine.