Improving sustainability without changing investment strategy

By Yan Swiderski, Global Returns Project

Published: 18 March 2024

In this ‘Decisive Decade’ for tackling climate change, investment managers face pressure from investors and regulators to improve their approach to sustainability. However, many managers are understandably reluctant to add a layer of complexity to a successful investment strategy. One interesting new approach is to incorporate climate philanthropy into business practice without changing investment style. Systematic donations to high-impact climate charities provide a valuable alternative – or complement – to investment managers’ other actions on climate or sustainability. 

The science is clear: we are in a ‘Decisive Decade’ for mitigating the worst effects of the Climate Crisis. The next six years require unprecedented action – by governments, corporations and individuals. 

As an industry, investment management understands the vital role it can play in directing capital towards planet-positive outcomes. Such activity has built momentum through initiatives like the Principles of Responsible Investing (PRI), the Net Zero Asset Managers initiative (NZAM) and the Taskforce for Nature-related Financial Disclosures (TNFD). 

Unfortunately, initiatives like PRI or NZAM normally place additional burdens on the manager in their reporting or investing processes but remain open to the criticism of being ineffective in terms of genuine measurable impact.

Indeed, investment managers also understand the reputational and marketing benefits of taking the Climate Crisis seriously. In September 2023, for example, a UKSIF survey found that 69% of respondents with financial investments ‘would be uncomfortable with their investments being in companies which negatively impact the environment and climate’.1

Yet for many investment managers, environmental, social and governance (ESG), ‘responsible’ or ‘sustainable’ investing remains the primary focus of their practice’s response to climate change. Sustainable investing is important but, on its own, remains insufficient – both for the reputation of investment management firms and for the broader planet.   

From a reputational perspective, an approach that relies exclusively on sustainable investing continues to carry risks of ‘greenwashing’ accusations. In October, a report from RepRisk found that greenwashing incidents by banks and financial services companies globally had increased by 70% since 2022.2 Many sustainable funds struggle to fulfil their environmental promises, making them imperfect mechanisms for investment managers to demonstrate positive intentions.  

From a planetary perspective, sustainable investing has fundamental limits to its efficacy. Certain essential climate solutions cannot deliver financial returns. These projects therefore fall beyond the reach of even the most effective ESG or ‘sustainable’ products. They include enforcing environmental law, combatting deforestation, defending ocean ecosystems and more. 

Climate philanthropy addresses many of these deficiencies. Charitable giving to climate organisations delivers clear impact on a short enough timescale to satisfy stakeholders and help avoid accusations of ‘greenwash’. Philanthropy can also support the ‘profitless’ projects ignored by most investment products. Climate charities can, for example, restore degraded forests, identify important marine mammal areas, establish marine protected areas and develop data tools on deforestation in supply chains. 

Unfortunately, the power of climate charities remains relatively unknown – both for individuals and within the financial services industry. Globally, less than 2% of philanthropic giving goes towards climate mitigation efforts.3 That figure has remained static over four years of reporting from the ClimateWorks Foundation. 

Investment managers stand to benefit from incorporating climate philanthropy into their approach to sustainability. Our planet stands to benefit, too. How might firms take climate philanthropy more seriously? 

Selection and monitoring of climate and nature charities is clearly a whole new workstream for some, but this work can be effectively outsourced.

For those firms that do not have the internal capacity or resources there are now climate philanthropy specialists who can provide the necessary expertise and capability.

Let’s consider a few of the available options:

  • Firms might begin by donating to high-impact climate charities regularly as a corporate social responsibility (CSR) action. These donations can be integrated more structurally by tying them to a proportion of revenue or profits. 
  • Firms might also integrate donations into the fee structure of specific investment products. Donating a defined proportion of the management fee from a fund, for example, builds the philanthropic contribution directly into the product. This donation can be integrated when launching a new fund or when launching a new share class for an existing fund.
  • Finally, firms might also donate to climate charities as a complement or alternative to purchasing carbon offsets. Carbon offsets have significant reputational and planetary challenges of their own. Last year, for example, an investigation found that 90% of rainforest carbon offsets provided by the world’s leading offset certifier were ‘worthless’.4 From a planetary perspective, offsets struggle to address systemic or hard-to-quantify climate solutions. 

Investment managers might choose to donate to climate charities instead of buying offsets, or alongside an offsetting strategy. In these cases, an objective price as set by the regulated carbon credit market might be used to determine a donation amount during annual accounting of carbon emissions. 

Investment managers must naturally make sustainability decisions based on both the health of our planet and the health of their own businesses. Climate philanthropy bolsters both. Charitable giving allows investment managers to avoid reputational risks and deliver real impact that matters – for employees, clients, stakeholders and our planet.,A%20RepRisk%20report%20released%20on%20Tuesday%20revealed%20a%2070%25%20increase,compared%20to%20the%20previous%20year

Unfortunately, the power of climate charities remains relatively unknown – both for individuals and within the financial services industry.

Globally, less than 2% of philanthropic giving goes towards climate mitigation efforts.