Climate Trust’s Answer to the Need for Institutional Investments in Climate Change
[This will be the last Scorcher for the summer of 2019. We will resume in early September.]
Climate Trust recently announced that its Fund I portfolio of carbon offset investments has started to generate its first cash flows. We get asked a lot about why a decades old non-profit would start managing an investment fund. The answer is pretty simple: institutional investors are starting to pay serious attention to climate risks in their portfolio, which is laudable, but if we want to see real progress on climate change, they should be looking at investment opportunities based on greenhouse gas reductions. We think the carbon markets are one of the best pathways of generating market returns while reducing emissions. The Climate Trust has been in the carbon markets for a long time – certainly longer than I have – and as an organization, we mirror the evolution of the carbon markets. Now we think it’s time not just to reflect the current state of affairs, but to lead by example.
There are lots of non-profits focused on climate change, and by and large, they do a great job of education and advocacy. These are two roles that Climate Trust has been, and will continue to be engaged in, but after two decades of managing carbon offset projects for regulatory and corporate buyers, and working deep in the trenches of carbon transactions, we decided to put our money where our mouth is, so to speak, and tackle the problem from an investor’s perspective.
We believe carbon market risk is not well understood and because of that two things happen: investors sit on the sidelines and carbon is undervalued. What we aimed to do with our pilot Fund I was to offer potential offset project owners, who were skeptical of carbon markets and the complexity of developing offset projects, a cash investment upfront in return for a portion of future carbon revenues. This allows project owners to sleep at night knowing their project is being well managed and that, whatever happens to carbon markets, they have a sizeable chunk of money squirreled away. And it offers Fund I investors market rates of return from environmentally beneficial carbon offset projects.
In finance parlance, this is about mis-priced risk. But that’s easy for Climate Trust to say because we understand the risks. We believe carbon markets will grow and offsets will increase in value, because that’s what we live and breathe. In late 2016, we thought it made sense to show the world (if they are paying attention) that, done right, carbon offset investments are a good idea. Hence, the Fund concept.
Fund I is now fully invested and starting to generate returns, but at $5.5 million we would be naïve to think institutional investors will be thoroughly convinced, so we plan to launch a second $10-15 million fund later this year to demonstrate the concept again at a slightly larger scale.
So why is a non-profit wading into the investment fund world? Because we are an action-oriented organization. We believe carbon offsets can deliver market rate returns, along with outsized conservation and climate resiliency benefits. An investment fund is our answer to the maxim: actions speak louder than words.