As larger and larger sums of capital move into sustainable and impact investing—now accounting for $1 in $3 of total assets under professional management in the US—nonprofits must adapt to a world where money from public, private, and philanthropic institutions is increasingly co-mingling to address everything from inequality to climate change.
Nonprofits should not try to turn themselves into Wall Street institutions, of course, and many nonprofits operate in areas unaffected by the growing sustainable and impact investing sector. But as a 2017 study observed, only two of the 17 Sustainable Development Goals—peace and justice and partnerships for the goals—had no prospects for private investment (and although not every subgoal within the other 15 goals lends itself to investment capital, a considerable number of subgoals ripe for investment were identified). The explosive growth of double bottom line investing not only provides many nonprofits a way to raise new money but also provides a significant opportunity to grow their influence in this new era, innovating how they raise capital and influence financial actors to keep up with changing times.
Our experience as grantmakers and investors—seeding many of the innovations that have taken shape as a result of collaborations between capital markets and the nonprofit sector—tells us that nonprofits can benefit from this new era in four ways:
1. Capital Market Tools and Innovations
Nonprofits with programs that solve environmental and social challenges can turn some of their initiatives into investable propositions.
For example, until recently the Nature Conservancy (TNC) has relied on philanthropic funding to support their critical conservation efforts in the Central Appalachian coalfields of Kentucky, Tennessee, and Virginia. A particular focus of their work has been St. Paul, a coal town in Southwest Virginia located along the Clinch River, an area long considered a biodiversity jewel, with one of the highest concentrations of globally rare aquatic species of any river in North America. However, recognizing that there was valuable forestland in the region that could be better managed for conservation and sustainable timber production (while also creating new jobs for the local communities suffering in the wake of the decline in the coal industry), TNC looked to the capital markets.
In 2019, they created the Cumberland Forest Limited Partnership (Cumberland Forest Project) and raised $130 million from private investors to acquire a quarter of a million acres of working forestland in the region. The offering was particularly attractive to investors focused on alternative investments such as natural resources, who will receive returns through revenues from carbon offsets and certified sustainable timber sales, as well as the sale of the land at the end of the investment period. This structure allows TNC access to significantly greater capital than relying on grant funding alone to meet its impact goal of protecting the natural habitat and preserving endangered species.
2. New Models for Collective Action
Even if nonprofits have no assets or programs that could attract investment capital today, they can build market infrastructure and facilitate global capital flows to investments and practices with quantifiable impact on their program goals.
For example, policymakers and the scientific community agree that protecting tropical forests at scale and creating a pathway to zero deforestation provides the single best opportunity to slow and ultimately halt climate change. It is estimated that these forests store a minimum of 250 billion tons of carbon, roughly equivalent to 200 years of human-induced carbon emissions. In 2019, the Environmental Defense Fund helped to establish a nonprofit facility called Emergent Forest Finance Accelerator (Emergent), in partnership with the government of Norway and The Rockefeller Foundation Zero Gap program. The partners worked together to build an intermediary that could facilitate financial transactions between companies that want to buy carbon credits or otherwise finance high-quality tropical forest emissions reductions and the tropical forest jurisdictions that can generate these emission reductions.
The ultimate goal is to keep the trees standing and, therefore, the carbon sink intact. Emergent has since grown its network and recently was awarded the mandate to coordinate the $1 billion LEAF Coalition (Lowering Emissions by Accelerating Forest Finance) announced at the 2021 Leaders’ Summit on Climate.
3. Shaping Bankable Projects
While there is increasing investment capital looking for sustainable and impact investment opportunities, the capital flows are often challenged by a lack of investment-ready projects and markets. Nonprofits can leverage their expertise and networks to help shape the design and readiness of impactful projects to meet the demand.
For example, the need to build resilient urban infrastructure has never been greater: with almost 70 percent of the global population projected to live in urban areas by 2050. Cities are centers of economic activity and innovation (accounting for 75 percent of global GDP), but they are also disproportionately vulnerable to natural disasters and social and economic inequities. To meet this growing need, the C40 Cities Finance Facility (CFF) is a collaboration between the nonprofit network of the world’s megacities committed to addressing climate change called C40 and the German Agency for International Cooperation. It facilitates finance for climate change mitigation and resilience projects in cities—such as flood protection and wastewater management projects in Dar es Salaam—by providing technical assistance to create bankable projects. Another example is CFF’s recently announced partnership with the Brazilian Solar Photovoltaic Energy Association to support Brazilian cities of Curitiba and Rio de Janeiro prepare projects and shape innovative policy mechanisms that will drive increased usage of solar energy, the first such projects in Latin America to focus on installing solar systems on retired landfills and bus terminals.
4. Advocating for Impact in Capital Markets
When nonprofits focus on the power of investment capital to make a positive impact on society and the environment, they can partner with investors and companies to create financial products that support advocacy for change.
In 2018, YWCA—a global nonprofit that has been a leader in women’s advocacy for over 160 years—helped develop an innovative investment partnership to guide investment capital towards sustainable companies and to help these companies further improve their business practices. YWCA’s engagement with Impact Shares (a nonprofit fund manager) resulted in the launch of the Exchange Traded Fund (ETF), called “Impact Shares YWCA Women’s Empowerment,” and listed on the New York Stock Exchange under the ticker WOMN. To make its investments, WOMN tracks an index of approximately 200 US large- and midcap companies that score high on a set of criteria designed to measure women’s empowerment, taking into account company practices and policies on topics like gender balance, pay equity, and work-life balance. YWCA brings its expertise to the partnership in multiple ways as it also engages in a dialogue with the companies on how to implement and maintain strong gender-equality practices. In return, Impact Shares donates all its profits from the management of the ETF to the YWCA. As Ethan Powel, CEO of Impact Shares, shared at the time of the product debut, “the ETF provides them [YWCA] with the tools needed to expand their impact into the private sector and help companies demonstrate leadership on issues impacting women.”
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