Markets and the Making of Climate Resilience

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by Katie Hoffman, principal of the Resilience Collaborative, LLC, a firm working with investors and innovators to shift capital toward equitable and scalable climate solutions across sectors

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The year I turned 26, scientists measured atmospheric concentrations of Carbon at 400 ppm for the first time in recorded history. According to former NASA scientist James Hansen, “If humanity wishes to preserve a planet similar to that on which civilization developed and to which life on earth is adapted…CO2 will need to be reduced [to] at most 350 ppm.” So the story translates: the arctic is melting. Seas are rising. Disease. Drought. Wildfires. Resource Wars. All while our human family is projected to expand to 9 billion over the next couple of decades. It’s all enough to make any person want to deny or ignore the facts, because digging deeper means challenging the very nature of the system we have built over the past two centuries. It means we have to Divest from the very infrastructure that created this crisis, and Invest in broad based solutions across every sector of society.

As I write this I am sitting in Paris, surrounded by my team planning our next set of activities alongside the 21st Conference of the Parties on Climate Change (COP21), where world leaders will come to some unbinding agreement about targets on reducing carbon in the atmosphere. Our firm’s focus in Paris is not the negotiations. While international negotiations have a place in creating solutions, our team is focused on accelerating the solutions that already exist. We are here organizing activities with an international network of investors, business and civic leaders who are dedicated to divesting from fossil fuels and other extractive industries and investing in cross-sector solutions. We are here to work with the private sector to create systems and standards that will accelerate the greatest capital shift in modern history in an equitable and organized fashion.

My road to Paris began in 2011, when I helped found a small fossil fuel divestment campaign at the University of California at Berkeley. I started the campaign because I believed the fossil fuel industry’s business model to be untenable, and did not find it prudent for my institution (or any other for that matter) to profit from the destruction of the planet. By 2012, a coalition formed nationally, and the campaign spread like wildfire (no pun intended). Within 12 months, the “fossil free” divestment campaign expanded from five campuses to 150. Churches, municipalities, individuals and family offices got engaged.

By 2013, I had worked with a small team to expand the campaign across California, working to get the University of California to create a “Divest-Invest” policy for its near $100 billion portfolio. By 2014, we successfully negotiated a policy with the Chief Investment Officer to allocate $1 billion of institutional investments towards clean energy innovation, alongside full integration of Environmental, Social and Governance (ESG) standards across the system-wide portfolio.

This University of California policy was adopted just two days before I traveled to New York to join the international Divest-Invest coalition at the People’s Climate March during the United Nations Climate Week. There we released our report before the UN stating that Divest-Invest commitments had reached a collective $50 billion assets under management (AUM). The Rockefeller Brother’s Fund, which accrued its wealth from fossil fuels, decided to commit to Divest-Invest as a part of our announcement. In light of the decision, Stephen Heinz, the Rockefeller Brother’s Fund director, stated, “We are quite convinced that if [John D. Rockefeller] were alive today, as an astute business man, he would be moving out of fossil fuels and investing in clean renewable energy.” A movement that started with a handful of students and NGOs, now reached the power center of American society.

After I returned home to California from New York, I was approached by former California state senator Tom Hayden to help write a bill to get the nation’s largest public pension funds, CalPERS and CalSTRs, to divest. Thanks to the leadership of many, including the president of California’s senate, Kevin De Leon, California became the first US state to agree to fossil fuel divestment through a legislative act in September 2015. Between the commitments from the University of California, Stanford, CalPERS and CalSTRS, California surpassed a collective $600 billion in AUM committed to Divest-Invest. With great excitement, our international coalition announced in December 2015 that commitments currently exceed $3.4 trillion AUM, spanning more than 50,000 individual and institutional investors globally. These new benchmarks indicate an adoption curve for Divest-Invest that will continue to shift toward large institutions, particularly as the largest insurer in Europe, Allianz, and the sovereign wealth fund of Norway recently joined the initiative.

The rapid growth of Divest-Invest numbers are intriguing, but the work is really just beginning. While divestment provides individual and institutional investors a tool to draw a moral and economic line, the next big leap is how and where we shift the capital. Contrary to popular belief, it is not hard to transition portfolios from fossil fuel companies without jeopardizing financial returns. Many firms have been leading to expand and launch investment vehicles that follow rigorous standards focused on ESG leadership. For example, ETHO, an Exchange Traded Fund that just launched on NYSE, is designed to optimize climate leadership across all sectors. Principium Investments, LLC has also built a series of customized portfolios that focus on ethics and market performance, paying attention to issues beyond clean energy, like gender equality and agriculture. Both firms have integrated and expanded the current “fossil free” standard, stated broadly by the political movement as the “top 200 publically traded fossil fuel companies with the largest carbon reserves.” ETHO has gone as far as excluding companies whose primary revenue is generated from the “ownership, extraction, distribution and/or sales of fossil fuels,” according to co-founder Ian Monroe.

As the “fossil free” movement grows more popular however, there are some products emerging that illustrate the need for enhanced due diligence moving forward. For example, the recent National Resource Defense Council (NRDC) endorsed fund launched by State Street claims to be “fossil free” but holds several companies whose primary business model is fossil fuel development, including, inter alia, Valero, Transocean and Phillips 66. The State Street fund has screened the companies with top reserves, because they follow a narrow definition of “fossil free” endorsed by a political movement. For investors, fiduciaries and the broader financial community, the time has come to determine what the financial universe will look like when we rigorously account for environmental and social costs currently externalized by extractive industries. A critical next step will be harmonizing standards for what constitutes overarching ESG, which necessitates more congruence between brands like Socially Responsible Investment (SRI), impact, fossil free and the like. This likely will not come from inside the walls of a conference like COP21. It will come from aligning many initiatives and conversations between suppliers, allocators and intermediaries toward specific projects that will shift key markets to adjust for climate risk.

That is why we created our firm. In a marketplace where leading climate consulting firms are also serving the needs of the very industries driving climate change — our firm is building a model dedicated to reversing that trend. We work to build bridges between allocators that want to address climate risk and those existing and emerging enterprises that need capital to reach scale. We approach this using two methods: the Propell3r (P3) and the Regenerative Capital Group (RCG). P3 is focused on building programs that incubate and accelerate entities with models that internalize climate risk and present viable financial opportunities across the risk and return spectrum. We specifically seek to provide resources and support to companies focused on agriculture, water and energy innovation. On the allocator side, we have been building RCG, which coordinates investors and capital managers seeking profitable climate investment opportunities across asset classes. Our firm sees both methods as a means to diminish barriers for suppliers and investors that want to put capital to work addressing pressing climate challenges.

It will take a groundswell to shift the necessary capital toward regenerative and renewable infrastructure that will prove resilient in the face of present and pending climate challenges. I’d like to believe we are reaching that point, particularly as more and more individuals are dedicating their human and financial capital toward addressing the interlocking political, cultural and financial roots of the problem. It is a little discouraging to think that I have been alive almost as long as governments have been attempting to negotiate climate solutions. However, when I look at my team, our mentors, and the broader economic and societal context of today, I see the strength of generations that have all the tools and resources to transform the financial system, and hopefully as a result, the climate too.

 

Article by Katie Hoffman, principal of the Resilience Collaborative, LLC , a firm working with investors and innovators to shift capital toward equitable and scalable climate solutions across sectors.

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