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Answers to Frequently Asked Questions About Net Zero Endowments

On Monday, October 18, 2021, the McKnight Foundation announced a commitment to achieve net zero greenhouse gas emissions across its $3 billion endowment by 2050 at the latest. So what does net zero mean, and why are we pursuing it? We answer this and several other questions here.

How do you define net zero?

  • Net zero is a comprehensive strategy to immediately reduce greenhouse gas emissions across the entire investment portfolio—including the fossil fuel sector—while also making new investments to build a carbon-free economy.
  • This rigorous approach requires scouring every corner of the endowment for emissions, discontinuing investments in high-emitters, such as any remaining fossil fuel investments, working with our more than 75 fund managers to decarbonize their holdings, and regularly communicating our progress.

What motivated McKnight to commit to net zero?

McKnight’s commitment comes at a time when people across the globe are experiencing first-hand the devastating impacts of climate change and scientists agree that we must take dramatic action to limit global warming to 1.5°C by 2050.

This approach to eliminate our emission impact across our portfolio means that we are employing the vast majority of our considerable resources in the effort to avoid the worst impacts of climate change.

Why is this a big deal?

McKnight and other institutional investors have power to create change when we invest. Businesses are the innovators and investors are the economic engine that will finance the shift to a clean energy economy. As money flows toward climate-friendly investments and away from heavy-emitters, we will accelerate the transition to a low-carbon economy.

If you want to address the climate crisis, why doesn’t McKnight act sooner to transform its investment portfolio?

We already have acted. Our net zero commitment is strong because it builds on a proven track record of climate investing:

  • 2013: Measured and began reducing carbon intensity of public portfolio.
  • 2014: Launched impact investing program with 10% of endowment earmarked for high impact investments, and sold coal from fixed income portfolio. With a $100 million investment, created a Carbon Efficiency Strategy fund with Mellon Capital Management to tilt toward companies that produced fewer greenhouse gases than their peers.
  • 2015: Joined Climate 100+ where some of the world’s largest investors push the 100 largest corporate emitters to set aggressive, science-based targets
  • 2017: Discontinued investments in companies with coal and oil sands reserves held by separately managed account managers.
  • 2019: Announced all real asset investments must have credible sustainability thesis.
  • 2021: Over 40% of endowment has mission alignment and $500 million is invested in a climate solutions portfolio.

2050 is far away, why can’t you do it sooner?

We couldn’t agree more that the need to act is absolutely urgent. And let’s be clear, we have been and will continue to decarbonize our endowment as rapidly as possible—and are urging our peers to do the same.

We’re proud that we’ve already halted investments in companies with coal and oil sands reserves, invested $500 million in climate solutions, and aligned over 40% of our endowment with our mission. Moving forward, our foot is firmly on the accelerator to keep making progress rapidly, and we will report back as we reach critical interim milestones.

How does net zero compare to divestment?

There are multiple strategies to reduce emissions in an endowment. Divestment looks specifically at the fossil fuel sector. Net zero is a more comprehensive approach to not only discontinue fossil fuel investments, but to go further by reducing emissions across all sectors in our portfolio.

Many sectors produce carbon emissions, and a net zero approach favors investing in companies that produce less, especially in comparison to what’s technologically possible.

How will you measure greenhouse gas emissions in your portfolio?

McKnight has a good understanding of the emissions in our public market investments now, but we have not measured across our private portfolio; by design these funds are less transparent.

We are working with our investment advisors at Goldman Sachs and Mercer to baseline that information now. Our next steps after we get comprehensive data will be to engage our fund managers and set ambitious interim targets.

Are there any trade offs that come with a net zero commitment?

The key trade-off is that we will need to let go of high-emitting investments and associated fund managers. However, shedding these riskier parts of our portfolio will set McKnight up to thrive during this energy transition and continue to be excellent stewards of our endowment.

What’s your view of the MacArthur Foundation and Ford Foundation commitments?

We welcome all efforts by more foundations to reduce their climate impacts and consider proactive decarbonization solutions across every sector. McKnight has worked closely with the MacArthur and Ford Foundations on our impact investing strategies and will look to future opportunities to collaborate and bring other peers along.

What are some examples of climate-forward investments McKnight has made?

With a $100 million investment in 2014, McKnight partnered with Mellon to create a broad Carbon Efficiency Strategy fund that puts fewer dollars in carbon-polluting firms and more in companies that are carbon-efficient. With about 1,000 holdings, the fund reduces the carbon intensity of its portfolio by 50% compared with its benchmark, all while outperforming the benchmark financially.  A win-win.

Delivering even greater returns, Generation’s Global Equity Fund is the best performing equity fund in the McKnight endowment, spurring the foundation to increase our initial 2014 investment of $25M by $50M in 2017 and again in 2018. The fund explores the economic opportunities arising from a planet under pressure, capitalizing on trends such as the growth of cities, water scarcity, and the imperative to stop climate change. It identifies well managed, well priced companies that will thrive in the long term. This was McKnight’s first “impact” manager to graduate to a full allocation in the endowment.

Why aren’t more foundations committing to net zero?

Well, somebody has to be first! We’re grateful to our one foundation peer that has committed to net zero—David Rockefeller Fund—as they have been an important resource to us. We also appreciate that much larger asset owners—pension funds like CalSTRS and CalPERS and academic institutions like Harvard and University of Michigan—that have announced these long-term goals. We believe more foundations will make this crucial commitment in the coming months and years.  As with impact investing, we believe our experience and transparency will be useful to others that are wrestling with how this moment calls us to act.

Topic: Impact Investing

October 2021