All Things Impact.

private capital & the public good

All Things Impact for June 3: major asset owners are ignoring climate risks

Brian WalshComment

Hi friends,

Here are four links worth your time (plus job postings, items of note, and a calendar of upcoming events): 

1. Effective Philanthropy: Pay for What it Takes & the "shadow economy" of nonprofit financing
We've talked before about the campaign to dispel the "overhead myth" - the nonsensical idea that nonprofit effectiveness can be demonstrated by how much nonprofits spend on "programs & services" vs. "overhead & administration." In the Stanford Social Innovation Review (SSIR), Jeri Eckhart-Queenan, Michael Etzel, & Sridhar Prasad argue that a "new grantmaking approach is needed - one that provides enough money for nonprofits to pay for all their operations, not just programs and services. The first step toward achieving that is for grantmakers to realize that different types of nonprofits have different cost structures."

"The advantage of a pay-what-it-takes policy is that it eliminates the need for the shadow economy in which funders and grantees purposely obscure financial data and quietly craft end runs around the arbitrary indirect cost spending caps imposed by most foundations. Foundation program officers, for example, often team up with grantees to recategorize underfunded indirect costs as direct costs that the funder covers. Other times, funders approve capacity-building or general operating grants to close the indirect cost gap. As a result, we do not know as a sector what it really costs to achieve impact.
“We know that for a grantee, 15 percent is not enough, so we give general operating support and capacity-building grants to compensate the grantee,” explains one program director. “One of our grantees is a very important partner,” says a foundation deputy director, “but we had to do a number of work-arounds, including creating a separate institute that the foundation could fund directly.”
A Bridgespan analysis of 10 grantees of one major foundation found that seven received additional financial support via work-arounds—the shadow economy in action. Work-arounds, particularly if under the table, create their own problems. They are inconsistently applied, and the time-consuming negotiations they entail increase complexity and raise transaction costs while distracting nonprofits and foundations from programmatic work. The pain inflicted by all these financing schemes, in both hard feelings and valuable time lost, is a major source of irritation for grantees and funders alike....
IRS Form 990, filed annually by most US nonprofits, is the best current source of information about a US nonprofit’s expenditures. Unfortunately, 990s don’t shed much light on actual indirect costs. The form has categories for “program” expenses and “management and general” expenses, but it gives nonprofits little guidance on defining the terms. That vagueness leads to widespread reporting inconsistencies as organizations apply their own definitions...As one nonprofit executive says: “If you think you can analyze a nonprofit through IRS filings, you are in outer space.”

2. Impact Investing: the GIIN's 6th annual survey of impact investors
Sophie Baker of Pensions & Investments reports on the Global Impact Investing Network (GIIN)'s 6th annual Survey of 158 self-identified impact investors. Survey respondents are mostly fund managers (60%), but also foundations (13%), banks (6%), and some development finance institutions, family offices, and 3 (not percent, just 3) institutional investors such as pension funds or insurance companies.

Here are some highlights:

  • Raising more money: money managers plan to raise $12.4 billion in 2016 vs. $6.7 billion raised last year
  • Deploying more money: investors plan to increase the capital committed to impact investments to $17.7 billion, a 16% increase from commitments in 2015 (by way of comparison, the U.S. venture capital industry invested$58.8 billion last year)
  • Closing more deals: investors committed capital across 7,551 deals in 2015, and plan to increase the number of deals to 11,722 this year
  • Range of return expectations: 60% principally target risk-adjusted, market rate returns, while 25% target ‘below market rate returns: closer to market rate’ and 16% target ‘below market rate returns: closer to capital preservation'
  • Investment targets: renewable energy, energy efficiency and clean technology were the most targeted environmental focuses; while finance, employment generation and health improvement were the top social impact themes
  • Performance: Almost 90% of all the respondents said the investment performance of the impact investments was either in line with, or above, expectations. Outperformance of these assets was reported by 19% of respondents.
  • Challenges to industry growth: "appropriate types of capital across the risk-return spectrum—especially early-stage (including seed and venture) capital that does not necessarily require high returns—and high-quality investment opportunities with track record"

3. Responsible Investing: major asset owners are ignoring climate risks
Nearly half of the world’s 500 largest investors are ignoring climate risks. Attracta Mooney of the Financial Times covers a recent report by the nonprofit Asset Owners Disclosure Project, which ranked large investors (including sovereign wealth funds, insurers and pension funds) according to their efforts to mitigate climate change risk:

"The world’s largest government-backed investment funds have been accused of ignoring the risks climate change poses to their portfolios despite warnings it could hurt returns and make high-carbon investments worthless...

Julian Poulter, chief executive of AODP, which collects information about investors’ exposure to environmental risks, called the findings “shocking”.

Climate change risk has risen up the global agenda over the past year, with nearly 200 countries agreeing to limit global warning at the UN’s climate change summit in Paris last December.

The move has prompted warnings that investors could suffer large losses as a result.

“[Investors] that ignore climate change are gambling with the savings and financial security of hundred of millions of people around the world and risking another financial crisis,” said Mr Poulter...

Ben Caldecott, director of the sustainable finance programme at the University of Oxford, said few asset owners consider the long-term risks of climate change, despite having liabilities many decades into the future.

The Financial Stability Board, an international body monitoring the global financial system, and Mark Carney, the governor of the Bank of England, have warned that climate action could turn fossil fuel and other high-carbon investments into worthless stranded assets, where the assets suffer large writedowns or devaluations.

Some pension fund members have demanded information from their plans on how their money is being protected against climate risks, under a campaign launched by ClientEarth, a non-profit, and ShareAction, a charity that campaigns for responsible investing.

Jamie Audsley, head of education at ShareAction, said: “Funds have a fiduciary duty to consider the impact that climate change might have on their portfolios.

“The global transition to a low-carbon economy presents both risks and opportunities for investments.”..

According to research published last month and led by the London School of Economics, climate change could cut the value of the world’s financial assets by $2.5tn...

Three of the largest coal companies in the US have filed for bankruptcy in the past year, as tightening environmental regulations and competition from cheaper fuels hurt their business model.

“The risk of stranded assets is real, it is here and we have already seen good examples of how it will materialise,” said Mr Pedersen.

4. Wildcard Topic: "A Universal Basic Income Is a Poor Tool to Fight Poverty"
Eduardo Porter argues in the New York Times throws cold water on the growing interest in the US and around the world for a Universal Basic Income:

"The popularity of the universal basic income stems from a fanciful diagnosis born in Silicon Valley of the challenges faced by the working class across industrialized nations: one that sees declining employment rates and stagnant wages and concludes that robots are about to take over all the jobs in the world.

That might lie in our future...But it’s certainly not our more than eight out of every 10 Americans in their prime are working...

It is undoubtedly true that the American safety net needs fixing. Fifty million Americans live in poverty. Sixteen million live on the equivalent of $8.60 a day. Providing more income security for the struggling working class would not only produce a more equitable society, it would also increase spending and improve economic growth.
In this world, though, where work remains an important social, psychological and economic anchor, there are better tools to help than giving every American a monthly check.
How about subsidized employment? The government could subsidize jobs as varied as school repairs and fixing potholes. “This would provide employment while doing things that improve productivity and improve people’s lives,” Mr. Greenstein said.
Perhaps we could expand the earned-income tax credit, the country’s most successful antipoverty tool, which increases the earnings of low-income workers. Or take the idea pushed for years by Edmund Phelps from Columbia University: Instead of providing a subsidy to workers that phases out as their income rises, why not subsidize workers’ wages instead?
As Mr. Summers told a gathering last week at the Brookings Institution, “a universal basic income is one of those ideas that the longer you look at it, the less enthusiastic you become.”

5. Job Postings

6. Items of Note

  • The MacArthur Foundation has launched an ambitious open grant competition 100&Change, a $100 million prized for a nonprofit - or even for profit - to submit a compelling idea to solve a major issue. 

Two upcoming webinars should be on interest to readers:

7. Upcoming Events
June 7-8  Social Innovation Summit (DC) Various
June 13 GrantStation Forum on Philanthropy (NYC) Effective Philanthropy
June 22-23 Social Impact Exchange - Conference on Scaling Impact (NYC) Effective Philanthropy
June 23-July 2  Aspen Ideas Festival (Aspen, CO) Effective Philanthropy
Sept 6-8  PRI in Person (Singapore) Responsible Investing
Sept 13-16  SOCAP (SF) Impact Investing
Sept 26-28 Exponent Philanthropy Conference (Chicago) Effective Philanthropy
Sept 26-28 ANDE Conference (Lessburg, Virginia) Impact Investing
Oct 9-14  Opportunity Collaboration  (Cancun Yucatan) Impact Investing
Oct 18  High Water Women (NYC) Impact Investing
Nov 3-5  Net Impact (Philadelphia) Various
Nov 9-11  Sustainable, Responsible, Impact Investing (Denver) Responsible Investing
Nov 16-18 Independent Sector (DC) Philanthropy
Dec 7-8  Global Impact Investing Network (Amsterdam) Impact Investing

That’s it for this week. Help me spread the word about #AllThingsImpact to your friends and colleagues, who can sign up to receive this newsletter at All Things Impact. Please also send me any job postings, items of note, upcoming events, or compelling links you discover in your own journeys across the web (even things like this girl experiencing a brain freeze for the first time).  

Until next time, thanks for reading!

Brian Walsh
Head of Impact at LiquidnetFull Bio.