Foundations: $600bn of assets that need to get active

Foundations operate with one arm tied behind their backs. As the owners of at least $600bn (€384bn) of the global economy, it is those investable assets that earn the money most give away each year. Using these assets more actively would add value to the grants that foundations award. It is also a key component of a grant maker’s fiduciary responsibility. Yet two recent reports on foundations and climate change demonstrate the chasm between financial and philanthropic investing. Both focus on actions that could mitigate the effects of global warming, help the world adapt to climate change and provide long-term solutions to slow the pace of this change. The first is “Taking Action on Climate Change,” a report from the William and Flora Hewlett Foundation. The second: “Design to Win: Philanthropy’s Role in the Fight Against Global Warming,” prepared by California Environmental Associates with support from six foundations, is the more detailed of the two reports. It estimates that foundations now make about $200m in grants annually to fight global warming and that at least an additional $600m is needed. Sadly, but not surprisingly, neither report even hints that financial investment of foundations’ endowments could have value. The $600bn therefore remains uninvolved.Climate change is not just an environmental issue. It affects all parts of society and encompasses virtually every cause that foundations support. To use endowments to support market-based solutions to climate change does not require a change in their guidelines. But it does require a change in thinking about the way that financial assets can and should be used constructively. What should these reports have said about what foundations can do to win the fight against global warming? Firstly, that they should vote their proxies on climate change. As large and small shareowners of corporations, foundations have an obligation to let the companies know their concerns.
In the next few months, at least 60 shareowner resolutions will be filed with more than 50 companies on a wide range of issues related to climate change. The proponents of these resolutions are state and city pension funds, labor unions, religious orders, a few foundations, and other institutional investors. The groups behind these resolutions collectively manage more than $200bn in assets.
Proxy voting makes a difference. In 2004, American Electric Power responded to shareowner pressure by issuing a report on the actions it was taking to significantly reduce carbon
dioxide and other emissions. In 2007, a number of resolutions were withdrawn after companies agreed to comply with the filers’ requests. Among them were Anadarko Petroleum, ConocoPhillips, Costco, Hartford Insurance, Prudential Financial, Starwood Hotels & Resorts, Toll Brothers, TXU Energy, and Wells Fargo. Other companies like ExxonMobil have remained unmoved by shareowner efforts on climate-change issues. Each year, however, more shareowners are voting in favour of resolutions that urge the company to take steps to reduce greenhouse-gas emissions. Last year, 31% of shareowners approved a resolution asking for a reduction of greenhouse gases. Now is the time for foundations to add their names to this list of proxy voters.
Secondly, foundations should consider making investments in companies and funds working for marketplace solutions to climate change. There is a strong business case. Innovest Strategic Value Advisors’ latest global analysis shows that companies that do the best in managing their carbon emissions surpassed the returns of companies rated below average in carbon-emission management by an annualized rate of return of 3.06%. The comparable figure for the United States is 2.4%, and 6.6% for Europe. Climate investing is not simply social investing, it is also investment for financial return.
Deutsche Bank, Goldman Sachs, McKinsey & Company, and other financial and management institutions have urged investors to pay attention. McKinsey says that “tackling carbon exposure is more than good environmental stewardship, it could also protect a company’s share price in the near term and create long-term competitive advantage.” The commitment of these mainstream financial institutions should give comfort to foundations’ risk-averse boards.The last years have seen remarkable growth in numbers and sizes of climate-change investment vehicles offered by investment houses, that have consistently considered environmental, social, and governance issues. Foundations should take advantage of opportunities while climate-change investing is still in an early stage.
Thirdly, foundations should consider investments in community-development financial institutions with the explicit purpose of responding to the problems that people will face due to climate change. Finally, foundations should align themselves with coalitions of like-minded investors concerned about climate change. These include the Carbon Disclosure Project, the Institutional Investors Group on Climate Change, which includes 35 of Europe’s leading institutional investors and the Investor Network on Climate Risk, coordinated by the social-responsibility group Ceres, which comprises more than 50 American institutional investors, including state treasurers, pension funds, leading labour funds and foundations with total assets of more than $4-trillion.
Together they have filed a number of shareowner resolutions on climate risk, have called on Congress to enact strong federal legislation to curb greenhouse-gas emissions, and have published a number of groundbreaking studies on the risks climate change can pose to companies’ financial performance. Passive capital should be made active in order to expand philanthropy’s mission and impact on society. Foundations of all sizes can and should use their financial assets to make a difference. They should not waste their assets.
Stephen Viederman, is former president of the Jessie Smith Noyes Foundation, in New York: s.viederman@mac.com