The Time Is Now: Invest/Divest 2022 - Climate Finance Trends to Watch

As we approach Confluence Philanthropy’s 12^th Annual Practitioners Gathering, let us take a moment to reflect on the powerful climate financial trends shaping our sector and what these trends signal for our own impact and decision-making in the year ahead.

2021 will no doubt be remembered as the year when an unprecedented number of financial institutions committed to long-term “net zero” emissions targets, generating significant debate regarding whether those commitments will meaningfully reduce emissions in the decisive years leading up to 2030. But 2021 also marked a profound moment in the arc of the climate movement and its deepening impact on the financial sector:

2021 marks the year when the fossil fuel Divest/Invest movement truly became unstoppable.

Ten years after the first divestment student campaign and on the eve of COP26, the movement held a briefing and released a new report revealing that more than 1,400 institutions representing an unprecedented $39.2 trillion assets under management (AUM) have now committed to some form of fossil fuel divestment. This figure represents a staggering 720 percent increase in AUM from the year 2014, when the movement first released global divestment data. And the numbers have only increased since the end of 2021, topping 1,500 institutions and the $40 trillion AUM marker at the start of 2022.

This explosive growth in divestment commitments tells a compelling story about the role of social movements in accelerating transformational change. The Divest/Invest movement has gone global, expanding far beyond its origins as a student-driven effort on college campuses. Campaigners around the world now target cities, states, foundations, banks, investment firms, and any player who participates in the global investment pool. Financial campaigns have sprung up to target bankers, asset managers, and insurers, aiming to cut the entire fossil fuel industry off from all of the financial services they depend on for expansion.

Philanthropic leaders have continued to step up to provide leadership in response to ongoing movement pressure. In September, the MacArthur Foundation announced a commitment to divest their investment portfolio from fossil fuels and invest in climate solutions. Soon after, the Ford Foundation, with its significant endowment and historic financial ties to the oil industry, made their own commitment to divest from some fossil fuels and invest in climate solutions. The Aileen Getty Foundation also announced their commitment, further showcasing what the collective Rockefeller family foundations and donors have shown — that those institutions with inherited wealth from fossil fuels recognize that now is the time to accelerate the transition into a clean energy future.

The financial case is unequivocal: divestment has weakened the fossil fuel sector’s economic dominance while helping to delegitimize the sector’s political influence. During the past decade, fossil fuel stocks have routinely underperformed the market, even accounting for a short-term surge in oil and gas revenues in the second half of 2021. Institutional investors are focused on these long-term trends. Big Oil once dominated Wall Street, literally setting the market pace as a major component of both the Dow Jones Industrial Average and S&P 500 indices. But those days are over. ExxonMobil was kicked off the Dow in 2020. Oil and gas companies now make up only 2.7 percent of the stock market’s value, down from 28 percent, even with 2021 gains.

Investors who have divested from fossil fuels and invested in climate solutions are outperforming while limiting risk. The Wallace Global Fund has outperformed our financial benchmarks for more than a decade, performing in the top decile of foundation returns as listed in the 2020 Council on Foundations Common Fund Report. This outstanding financial performance happened while we were nearly fully divested from fossil fuels by 2012 and completely divested by 2014, with more than 15 percent of our portfolio invested in climate solutions. Investors can take a strong, mission-driven approach to their investments and make a whole lot of money in the process.

It is, however, no longer enough for investors to commit to divesting their assets from fossil fuels. How our money is invested is now just as important as where it is invested. While Divest/Invest Philanthropy has always asked our peers to make investment commitments, the movement is now demanding that all investors immediately invest a minimum of five percent of their assets in climate solutions, doubling to 10 percent by 2030. These investments must center a just transition — one that avoids the mistakes of past economic shifts — as well as economic, gender, and racial justice. A just transition must focus on workers and communities who have depended on fossil fuels; indigenous communities who have faced generations of injustice; women and children who are disproportionately impacted by the effects of climate change; and hundreds of millions of people on the last mile, excluded from the fossil fuel economy, who can now be reached with off-grid, distributed, and renewable energy.

As with divestment, there is evidence that investing in a just transition makes economic sense, but it will take mission-driven institutions to lead the way in directing capital where it is most needed. Impact funders can provide early seed capital for just climate solutions. We can scale and replicate viable enterprises that will help to achieve sustainable energy access for all, provide good, stable jobs for workers, and build stronger, healthier communities.

Time is running out to stand on the right side of history. We look forward to gathering with Confluence Members in March 2022 and joining with our friends at RBC Wealth Management and Amalgamated to host an interactive session with institutional investors and philanthropic funders on the next phase of the global Divest/Invest movement.

Click here for details on the 12^th Annual Practitioners Gathering agenda and to register

- Heather Coleman, Director, Environment Program, Wallace Global Fund