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Philanthropy Teams Up With Institutional Investors to Fight Climate Change

September 07, 2017

Carbon_0As the world works to tackle climate change without the leadership of the U.S. government, there's a growing need to connect philanthropy to institutional investors and catalyze change at a pace rapid enough to be meaningful. Because philanthropy typically is associated with nonprofit activity, that combination may sound surprising. But because climate change represents such an extraordinary threat, it's imperative we compress the dynamics of innovation and scale through new approaches.

That's why Planet Heritage Foundation, where I am the executive director, co-created and funded the launch of Aligned Intermediary, a global investment advisory firm that works with institutional investors to channel capital into "climate infrastructure" sectors such as clean energy, water, and waste-to-value. These investors — sovereign funds, pensions, endowments, insurance companies, family offices, and foundations — represent more than $80 trillion in assets and are the only stakeholders other than governments with the capacity to invest at a scale that can begin to slow and, ultimately, reverse the world's spiraling carbon emissions.

With less than 1 percent of institutional capital currently being deployed to the climate infrastructure space, we simply do not have the luxury of letting markets organically dictate the timing of our climate change actions. The climate infrastructure industry needs to be exponentially ramped up over the next five to ten years, and that will require the development of new financial products, business models, and business practices. Put another way, we need to make institutional investing in climate infrastructure as easy and standardized as investing in global real estate — and we need to do it quickly. Patient capital, the kind provided by foundations and philanthropy, will be critical to those efforts, and jump-starting the flow of it into climate change efforts is crucial.

After only a year, the Aligned Intermediary model is already demonstrating promise in this regard. Led by co-founder and CEO Peter Davidson, who previously ran the U.S. Department of Energy's Loan Programs Office, the organization has secured member commitments totaling $1.45 billion from institutional investors in five countries — the United States, Australia, Canada, New Zealand, and the United Kingdom. Institutions making commitments include the Regents of the University of California, the New Zealand Superannuation Fund, TIAA Global Asset Management, Ontario Public Service Employees Union Trust, the Wellcome Trust, the Church Commissioners for England, the Wafra Investment Advisory Group, the Leonardo DiCaprio Foundation, and Cbus (in Australia).

The model is an entrepreneurial one, with the founding partners behind it each possessing a necessary asset: Davidson (domain expertise), Ashby Monk (advisory experience in the institutional investing world), and myself (a history of collaborative platforms for social change).

In partnership with Sarah Kearney (PRIME) and Alicia Seiger (Stanford University), we initially attracted grant funding totaling $500,000 from four philanthropies — the Hewlett Foundation, the MacArthur Foundation, the ClimateWorks Foundation, and Planet Heritage Foundation — for research that demonstrated the potential of our model. Planet Heritage then funded the first year of Aligned Intermediary's operations as a public benefit corporation with a $1.5 million program-related investment (PRI), which made it possible for Davidson to start assembling a team of experts and analysts.

In the year since it opened for business, Aligned Intermediary has closed two deals and advised on a number of others, resulting in about $150 million in climate change investments. That's an impressive return on our $1.5 million PRI and underscores the potential of the model with respect to climate infrastructure for both philanthropic and institutional investors.

But perhaps most exciting is that the organization almost immediately began receiving requests for opportunities from a broader group of investors — beyond the member institutions noted above, who are looking for market returns on transactions of $25 million and up. So a related vehicle called Aligned Partnerships was created to mobilize smaller investors for infrastructure investments that fall below the $25 million+ threshold.

In addition, the organization recently started building out a strategy to de-risk climate infrastructure investments in emerging markets by blending institutional capital seeking market returns with concessionary capital seeking specific social, development, and/or economic goals. And it is actively considering additional offerings to meet growing demand. In other words, the organization is evolving into a much-needed hub for climate infrastructure capital and, with a little luck, will begin to transition into a financially self-sustaining one in 2018.

As governments become less willing to bankroll transformative change, innovative funding mechanisms will be a critical component of our efforts to address climate change. Bringing foundations and institutional investors together to fast-track investments in climate infrastructure that also generate significant returns is one way to do that. If you're a foundation or institutional investor and would like to learn more about how you can participate, we’d love to hear from you.

Headshot_tracey_durningTracey Durning is the executive director of the Planet Heritage Foundation.

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