By Brigette DePape. (This article is a shorter version of a report submitted for publication.)
Foundations and climate change
To respond to the greatest challenge we face as a planet, climate change, the global economy must transition to a low-carbon economy. Institutional investors, like foundations and inter, play an important role in this transition. In recent research, we conducted interviews with leaders at philanthropic foundations to learn more about the role of foundations in financing the transition to a low-carbon economy.
Foundations can be leaders in sustainable finance
With Canadian public and private foundations’ assets totaling $91.9 billion in 2018, they could make a significant contribution to Canada’s transition to a low-carbon economy through their endowment investments. While foundation assets may be smaller than other institutional investors, such as pension funds, they’re well-suited to mission-driven investing, given their nature as mission-driven organizations. As is highlighted by Environment Funders Canada in The State of Responsible Investing at Canadian Foundations, responsible investing is an opportunity for mission-driven organizations to drive positive environmental, social and governance changes through their investments. For example, the US-based F.B. Heron Foundation invests 100% of their endowment towards mission. Leading Canadian foundations have also made this commitment.
A small but growing number of foundations are engaged in social finance
Beginning as early as 2010, the Canadian Task Force on Social Finance recommended that Canada’s foundations invest at least 10% of their capital in mission-related investments (MRIs) by 2020 and report annually to the public on their activities. While foundations are required to grant a minimum of 3.5%, the rest is generally invested with the sole purpose of maximizing financial returns. The vast majority of wealth is invested in conventional products, but it’s encouraging to see a growing number of foundations invest in social finance. However, as noted by Karim Harji and Tessa Hebb in Intersections and Innovations, the potential for impact investing at Canadian foundations has yet to be realized. The recently announced federal government’s social finance fund could propel activity to new heights.
Impact investing delivers financial, social and environmental results
A common barrier to impact investing is the misconception that it won’t deliver financial returns. However, many foundations shared that their environmental, social and governance (ESG) investments outperformed traditional investments in 2020. From a risk-management perspective, financial experts anticipate that ESG investments will generate superior results over the long-term. The benefit of impact investing is that it generates the financial return needed for grant-making, while also advancing environmental and social impact.
Forces of sustainable, impact investing at foundations
We identified key driving forces that are advancing sustainable investing at foundations. While government regulation isn’t currently a major driving force, foundations are influenced by one another through networking. Staff, board members, Indigenous trustees, young people and donor advisors are forces behind mission-aligned investing.
Disclosing and knowing the environmental impacts of investments can help foundations identify unsustainable investments and make evidence-based decisions towards more sustainable investing. Concurrently, we heard from philanthropic experts that too much focus on reporting could detract time and resources from identifying and making sustainable, impact investments. There needs to be a balance. Philanthropic leaders also warned that it’s important to be mindful of “impact washing” and to see past market ploys to understand the actual ESG impacts of investments.
Recommendations for the philanthropic sector
As mission-driven organizations, foundations can be leaders in social finance given their interest in impact and investments that take ESG factors into account. Given the existential threat that climate change poses, foundation resources can’t remain on the sidelines. Our research makes four recommendations to Canadian foundations to advance sustainable investment:
- Examine the feasibility of mandatory reporting through the T3010 on the percentage of foundation assets that are mission-aligned.
- Educate foundation boards and investment committees on ESG and impact investing, especially as it relates to climate.
- Develop a mechanism for foundations to coordinate analysis regarding due diligence and ESG performance of investments.
- Seek greater diversity on foundation boards and investment committees, including people who are Black, Indigenous, racialized, women, LGBTQ2S, young, and knowledgeable about climate and sustainable finance.
Brigette DePape is a Social Innovation Fellow and a master’s student in the MPNL program at Carleton University. Dr. Tessa Hebb, Senior Research Fellow with the Carleton Centre for Community Innovation, guided and edited DePape’s research. DePape is on LinkedIn and Twitter. (Photo of hands is courtesy of Shane Rounce and Unsplash.)
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Wednesday, May 26, 2021 in Research from Alumni, Social Finance
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