2018 Industry Innovation Awards

ESG

The Sierra Club Foundation

Dan Chu, Executive Director
Art by John Jay Cabuay

The Sierra Club Foundation is one of the few investors that has a complete $100 million portfolio of public equities invested in ESG and fossil-free funds. These investments beat standard indexes’ benchmarks while also focusing on clean energy innovations that increase quality jobs and economic development for all. 

“The performance is actually as good, if not better than, if we didn’t do any of that screening,” said Dan Chu, executive director of the foundation for the past two years.

In fact, over the past 10 years, the foundation’s environmental, social, and governance (ESG) investments have outperformed a blended benchmark comprised of Thomson One, Russell 3000, MSCI ACWI, Barclays Aggregate, FTSE NAREIT, and HFRI Fund of Funds by 40 basis points, and, in the last five years, by 110 basis points per annum, net of fees.

At its core, ESG investing seems a commonsense approach to building out a portfolio, and more investors are using it to identify potential blind spots.

As a 501c3 organization, in 2007, the Sierra Club Foundation framed its portfolio around its goals to:

  • Solve the climate crisis through advancing resource-efficient clean energy economy
  • Secure protections for public lands and waters, and promote healthy ecosystems and communities
  • Advance programs and policies that reach across economic, cultural, and community lines to get people outdoors
  • Build a diverse, inclusive environmental movement that prioritizes important connections between environmental health and social justice

“We’re thinking: How is our investment actually helping to move our capital towards those objectives,” Chu said.

It began with fossil fuel divestment more than a decade ago, and, in 2015, SCF committed to invest at least 20% of its portfolio in new clean energy/climate solutions investments at the White House Clean Energy Summit.

“Today, almost all of our investments are mission-related investments related to clean energy and climate solution public equities,” Chu said.

Clean energy solutions such as solar, wind, and weatherization are sometimes pubic equities and fund investments.  Other successful ESG investments are often found at the fringes. One such investment includes a semi-private manager who purchases solar- and wind energy-producing assets with long-term power purchase agreements, selling them back to investment-grade utilities. “It’s a coupon-clipping strategy that gives the foundation exposure to the infrastructure space, but it’s all renewable with a very quick cash flow back so there’s virtually no J curve as with a traditional private energy strategy,” notes FEG consultant Tim O’Donnell. “It’s been a very successful investment.”

Although it maintains a small advocacy fund which holds some fossil fuel stocks so that the Sierra Club Foundation can engage with oil companies and banks that are financing fossil fuel, given its mission, The Sierra Club Foundation must also be, perhaps, more hyper vigilant than the average ESG investor.  If, for example, someone gave the foundation $100,000 to help solve the climate crisis and the foundation invested it in fossil fuels, that would be a breach of trust and carry a huge reputational risk.

So, the Sierra Club Foundation seeks alternative ways of achieving its returns for its planned giving portfolio, long-term operating portfolio, endowment portfolio, short-term, and cash equivalent portfolios. (The planned giving portfolio functions similarly to an annuity with a tax donation advantage. For example, if someone contracts with The Sierra Club Foundation for $100,000  at the age of 80, the foundation gives them the donation advantage for their taxes, holds the $100,000, and pays them back a 7% monthly return until their death.)

Chu focuses on protecting the capital and having at least 5% return on it, because 5% of the interest above that capital is being provided for charitable work by the foundation and other entities.

It’s also looking for market-return private investments primarily in the venture space, which can be fairly high risk because oftentimes the managers are very early in the round of financing. Its thesis is: what are the emerging technologies that will lead the economy and lead the world once we move beyond fossil fuels? Like many investors, it is seeking to make investments that can generate long-term or a rate of return above and beyond what the broad markets are going to deliver and get a public market equivalent out of its private investments that is in line with what expectations are for venture investments.

Moving forward, the foundation is exploring high-impact investing opportunities that not only advance clean energy, but also result in greater social equity. It is seeking opportunities that attract capital for underserved populations and their access to affordable clean energy and stimulate quality job growth for those communities.

“The difference between impact investing versus mission-related investing for us is having a desired outcome to advance social equity flow,” Chu said.

By Christine Giordano

ESG Finalists

  1. CalSTRS
    Chris Ailman
  2. Rob Manilla
    Kresge Foundation
  3. MacArthur Foundation
    Susan E. Manske
  4. Norwegian Sovereign Wealth Fund
    Geir Øivind Nygård
  5. Illinois SURS
    Douglas Wesley
  • Rosalind Hewsenian
    Foundation
  • Anne Dinneen
    Endowment
  • Susan Ridlen
    Corporate Defined Benefit Pension Plan Below $15 Billion
  • Harshal Chaudhari
    Corporate Defined Benefit Pension Plan Above $15 Billion
  • Sam Masoudi
    Public Defined Benefit Plan Below $15 Billion
  • Jonathan Grabel
    Public Defined Benefit Plan Between $15 Billion and $100 Billion
  • Chris Ailman
    Public Defined Benefit Plan Above $100 Billion
  • Anthony Waskiewicz
    Healthcare Organization
  • Robert
    Defined Contribution Plan
  • Paul Ballard
    Sovereign Wealth Fund
  • Dan Chu
    ESG
  • David Holmgren
    Collaboration
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