McKnight Reports on One Year of Action Toward Net Zero
When Hurricane Ian tore through southwest Florida on September 28, 2022, devastating communities with winds over 100 mph and a record-breaking storm surge, millions were left without power. But throughout the storm, the lights stayed on in the nearby town of Babcock Ranch, which was built to withstand extreme weather and flooding, and is powered fully by a local solar farm and battery storage system. The community is a model for climate resiliency—a place where careful planning and strategic investments made all the difference.
As the climate crisis reaches more communities around the globe with greater intensity, we have a window of opportunity to adapt our practices and invest in a resilient future where people and planet thrive. In the face of devastating climate-related impacts, institutional investors like the McKnight Foundation have a responsibility and an opportunity to squeeze climate-harming pollution from our endowments and ambitiously invest in high-performing climate and clean energy solutions.
“Our endowment is a critical tool for achieving McKnight’s bold climate mission, and we hope that by sharing our actions and what we’ve learned it will inspire others to make similar commitments.”—ELIZABETH MCGEVERAN, DIRECTOR OF INVESTMENTS
In October 2021, McKnight pledged to reach net zero emissions across our $3 billion endowment by 2050 or sooner. In our first year of racing toward net zero, our Investment Team:
- Established a greenhouse gas emissions baseline across asset classes
- Invested further in new and innovative climate-forward strategies
- Engaged fund managers about their plans to decarbonize their portfolios
Our endowment is a critical tool for achieving McKnight’s bold climate mission, and we hope that by sharing our actions and what we’ve learned, it will inspire others to make similar commitments. Investors must anticipate changes in future markets, but our investment decisions today create those same markets tomorrow. In this way, we have enormous power to create change when we invest. As money flows toward climate-friendly investments and away from heavy emitters, we will accelerate the transition to a low-carbon economy.
McKnight Foundation Net Zero Strategies
Establishing a Comprehensive Baseline
Back in 2014, McKnight conducted its first carbon emissions assessment of our public equity portfolio, finding 8% lower carbon intensity than benchmarks. We only analyzed public equity given data and transparency limitations. Following that first look with Imprint Capital, we decarbonized ambitiously, investing in strategies better positioned for the transition with more like-minded firms and implementing screens to eliminate companies with coal and tar sands reserves. By 2021, over 40% of the endowment had mission alignment and $500 million was invested in a broad climate-solutions-focused portfolio.
After making our net zero pledge, we immediately set to work creating a 2021 baseline analysis on the carbon exposure of our entire endowment. Partnering with the Mercer Analytics for Climate Transition (ACT) team, we learned that the McKnight endowment—across public equity, fixed income, absolute return, and private investments—is well positioned for net zero compared with indices and peers, affirming our years of targeted investments to decarbonize.
We found that as of year-end 2021, McKnight Foundation’s portfolio has 24% less carbon intensity than global equities. The analysis covers over 70% of the endowment with actual or reasonably estimated data, and we’re hopeful to have near 100% by the end of 2022. Gathering baseline emissions data remains a challenge in emerging markets, hedge funds, and private markets, particularly venture capital. We’re optimistic that developments like this year’s proposed SEC rules on climate-related disclosure will help provide investors with more uniform, reliable information.
Digging deeper into the analysis, we learned that the main drivers of portfolio emissions in McKnight’s endowment come from utilities, airlines, and materials. Among our public equity holdings, the most intense emission assets weigh only 0.6% in market value, but account for 21% of carbon intensity. Knowing this data allows us to prioritize what can be shed to reduce emissions quickly, and how we can engage with managers and companies more thoughtfully.
We also discovered that 35% of our portfolio is already aligned with our net zero goal. Counting impact and aligned investments is always challenging, even for our own portfolio. The Investment Team is now classifying all our strategies into four categories to help assess current and potential net-zero alignment:
McKnight Foundation Portfolio Net Zero Alignment, 2021
Climate Solutions (17%)
Investments in managers, products or services that are actively solving for climate change. These may also provide negative emission exposures or offsets.
Climate Aware (18%)
Investments where the manager has an active thesis, or utilizes tools, that consider the materiality of climate change.
Climate Agnostic (10%)
Impact investments that are not focused on climate but are closely aligned with McKnight’s broader mission.
Traditional (55%)
Conventional investments or managers who lack an integrated approach to ESG.
What’s next? After completing our baseline emissions assessment at the end of 2022, we will set and disclose short and medium-term reduction targets for 2025 and 2030 that will demonstrate ambitious momentum toward our goal of achieving net zero by 2050 or sooner. Goals will allow us to assess whether we are on track.
Making New Investments Toward Net Zero
McKnight learned early on in 2014 when we began our Impact Investing program that the climate and clean energy investment manager pipeline was strong and attractive and that other managers were increasingly integrating a climate perspective. We believe our net zero portfolio is aligned with commercial innovation and strategic investment opportunities for profit and planet.
In the last year we hired several new public equity managers that will help us reduce emissions, and below are three notable examples.*
Engaging with Fund Managers
As an asset owner, our net zero commitment is a signal to current and future fund managers and markets of the urgency with which we are prioritizing this massive economic transition.
These signals help fund managers better advocate for improved transparency and data collection within their firms and portfolio companies while creating incentives for them to develop products that meet net zero requirements.
Over the last year, we engaged our more than 75 fund managers in some way about our net zero ambitions and their fit for our portfolio. By interviewing some of our traditional private equity managers, we discovered a larger number than we expected are planning to assess greenhouse gas emissions and position portfolio companies for disclosure in the future, although there are varying degrees of readiness.
In general, Europe-based managers are more willing and experienced with net zero reporting and commitments. Among those we interviewed, some private equity managers are providing interesting financial incentives to their portfolio companies to drive decarbonization or harnessing data to create opportunities for efficiencies.
Beyond fund managers, we also seek opportunities to join other asset owners in shaping regulation, voting annual proxies, and taking collective action through organizations like Ceres, CDP, and Climate Action 100+.
Net Zero Team
Institutional Investor Points of Leverage
Next Steps and Important Questions
In the next year of action toward net zero, McKnight will continue to leverage our roles as an owner of assets, a customer of financial services companies, a shareholder, and a market participant to the fullest extent possible through a four-part plan:
- Set targets: We will announce interim targets for progress by 2025 and 2030, and build a granular implementation plan focusing on asset classes, managers, and strategies to achieve near and long-term targets.
- Invest in solutions: We will race to capitalize on new investments profiting from the climate transition and seek opportunities to drive climate risk management and greenhouse gas reductions through existing conventional investments. We will also further codify net zero alignment in the due diligence process and identify priorities and thresholds for new investments.
- Engage counterparts: We will identify promising new fund managers who can contribute to our net zero ambitions, while also engaging our existing managers to join us in net zero work.
- Communicate progress: We will make regular reports on progress and commit to sharing experiences with peers.
“As institutional investors, we play an important role to push markets toward a more renewable path.”—ELIZABETH MCGEVERAN, DIRECTOR OF INVESTMENTS
We are also wrestling with a couple important questions. What does “net zero by 2050 or sooner” mean to the McKnight Foundation? Can we move faster? How do we advance equity in the transition to a low carbon economy? How can we advance diverse and emerging managers and entrepreneurs who possess innovative ideas but lack the access to institutional investors? What additional risks does net zero introduce in portfolio management? Also, we are thinking critically about the role of offsets in achieving net zero given lively debates about their permanency and effectiveness.
What we do know is this: Despite waves of disruption from climate change, armed conflicts, the pandemic, and rising inflation, we are also at a critical moment for climate progress as the past year produced unprecedented levels of investments in climate and clean energy from our federal government and industry. As institutional investors, we play an important role to push markets toward a more renewable path. We urge you to join us in the growing movement of investors organizing our considerable financial resources around a resilient, net-zero, and climate-friendly economy.
Support for moving forward: We were honored to be the second U.S. foundation to commit to net zero, after the David Rockefeller Fund, which was an important resource to us. We also applaud the Russell Family Foundation for making a net zero commitment in October 2022. To date, we remain the largest U.S. foundation to pursue net zero. Consulting with larger endowments and asset owners—pension funds like CalSTRS and CalPERS and academic institutions like Harvard and University of Michigan—provided comfort that we were well-positioned for net zero. Today we are serving as a similar resource, advisor, and collaborator to other U.S. foundations. 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.
* Disclaimer of Endorsement: The McKnight Foundation does not endorse or recommend any commercial products, processes, or service providers.
