November 8, 2023

How Individual Donors and Family Offices Can Use Impact-First Investing to Catalyze Climate Solutions

Contrary to what they might assume, individual and family-office impact investors can make a real difference in combating climate change. Their impact can also be catalytic—if they are willing to take some risks and forgo market-rate returns. Pioneering impact-first investors are showing the way. 

By: Michael Etzel, Sonali Patel, Chris Addy

Climate is an area with huge opportunities for impact investors. According to the Intergovernmental Panel on Climate Change, climate goals are now badly underfunded, with an estimated annual financing gap of $1.6 trillion to $3.8 trillion through 2050 to limit warming to 1.5 degrees Celsius. And that’s just for mitigation—reducing the emissions of greenhouse gases. If you add in adaptation—reducing the vulnerability of human or natural systems to the impacts of climate change and climate-related risks—the United Nations estimates an additional $140 billion to $300 billion in annual costs from 2020 to 2030.

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The sheer magnitude of climate change requires not only very sizable investment but a wide range of vehicles, from big private-equity investments in renewable energy to grants to organizations and projects that support environmental justice, electricity innovation, green industry, transitioning to climate-smart agriculture, and innumerable other climate-related objectives. Yet the climate space, with its perceived complexity and huge volume of both needs and opportunities, can be intimidating for family offices and high-net-worth individuals, who frequently tell us they don’t believe they can make a dent in climate change because they don’t have the resources of a Bill Gates or Jeff Bezos.

The truth is that such investors can make a big difference in combating climate change through impact-first investing.

What Is Impact-First Investing?

Quite simply, impact-first impact investing—sometimes known as “catalytic capital”—is a type of impact investing that prioritizes impact over market-rate returns. For philanthropists, it therefore occupies a middle ground between market-rate (or “finance-first”) impact investing and philanthropic grants.

According to the MacArthur Foundation’s Catalytic Capital Consortium, impact-first investing “is well suited for investors who want to support enterprises or funds that have high-impact potential but struggle to raise suitable financing because they are too early stage or otherwise risky, expect to generate only modest financial returns, or require a longer investment time horizon.” That type of patient, risk-tolerant capital is just what is needed for climate solutions.

Approaching Climate Change Work

Although, as we’ve observed, climate change is an enormous issue, family offices and high-net-worth individuals need not be daunted by the idea of investing in climate solutions.

Consider the example of Mike Schroepfer, former CTO of Facebook, who in late 2020 began to explore what his family office, Additional Ventures, could do around climate change. Though initially skeptical that climate impact could be achieved with limited investments, after speaking with like-minded donors and peers, Schroepfer decided to begin making grants with a defined pool of capital. This gave him the opportunity to start learning about the most pressing climate issues he could help tackle in partnership with organizations taking big risks.

When Schroepfer began working in climate, he sought out opportunities with a few basic principles in mind. First, he wanted to maximize carbon mitigation per dollar spent. Second, he wanted to fund ideas that were in some way catalytic, possibly resulting in new technologies that could later become self-sustaining or that another investor without Schroepfer’s risk tolerance would be unlikely to take on. A good example: his support of a public benefit corporation and partner nonprofit that is testing the use of carbon-removing sand made from naturally occurring minerals to counter ocean acidification and permanently remove carbon dioxide from the atmosphere.

While he began by making grants, Schroepfer got to know organizations and saw that, as great ideas matured, they would need different kinds of funding—grants at first, then debt, and then possibly even equity to transition to market-facing organizations. This attracted him to impact-first investing, with which he could support promising organizations from proof-of-concept through to commercialization (while continuing to maintain a grant pool for organizations that might never commercialize).

An Impact-First Strategy for Climate Funding

As Schroepfer’s story illustrates, not all support for climate-change mitigation needs to be in the form of grants. Families and high-net-worth individuals can dedicate a larger portion of their wealth by diversifying their portfolios across a mix of grants, market-rate investments, and impact-first investments. Early-stage, high-risk capital investments in promising new technologies that can later attract investors can be a high-leverage way to support the climate transition. (It’s also a great way for investors to use their skillsets from their day jobs, either as entrepreneurs, managers, or investors, by offering sweat equity to new ventures.) If you have a pool of money with which you can take more risk, or for which you don't need to maximize returns, you can buy extra impact with your additional risk tolerance. 

This is the spirit of impact-first investing. Wondering how to get started? Here are three approaches to shifting assets to impact-first climate investing:

Outsourcing investment decisions to an impact-first fund. This is the easiest way to begin making impact-first investments. The Prime Coalition’s Prime Impact Fund is a great example, as is the Southeast Asia Clean Energy Facility. Another is NatureVest, the impact-investing initiative of the Nature Conservancy. NatureVest invests in impact-first vehicles to support oceans, forests, sustainable agriculture, and green infrastructure for cities. While it does not have an in-house fund, it does structure specific deals and raises capital for them, often in partnership with other investors. NatureVest aims for deals that are the first of their kind and that create new markets—for example, the first stormwater bond, which NatureVest issued in partnership with Encourage Capital and Prudential Financial to offer $1.7 million in loans for improved stormwater management for Washington, DC. Individuals can also co-invest with NatureVest. 

Don’t forget about debt. As NatureVest demonstrates, there is considerable demand for patient or risk-tolerant debt in the climate space, particularly for organizations that are addressing the critical adaptation challenges marginalized communities face. For example, Beneficial Returns provides loans to small- and medium-sized enterprises that create income and protect the planet, particularly in Latin America and Asia. In the United States, California FarmLink offers loans to farmers and ranchers, particularly those of color, working with sustainable and organic practices. (A list of additional debt options is available here.) 

Launching your own vehicle. Some investors are launching their own impact-first vehicles. For example, longtime investors Chris and Crystal Sacca, known for bets on Uber and Twitter, founded Lowercarbon Capital as a family office with tens of millions at its disposal. As the idea grew with family capital and bets on climate technology became clearer wins, the fund raised $800 million from outside investors in 2021. A year later, it raised a second $350-million fund to focus on carbon-removal ventures. “We saw billions of dollars of demand [for carbon removal] piling up, and we launched a separate fund to build the supply side,” Chris Sacca told the Capital Allocators podcast. “We call that one 7.81 because with that fund we believe we can pull 7.81 gigatons of carbon out of the atmosphere. And when we do so, we will reduce the parts per million [of CO2] in the atmosphere by one.” 

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Individual investors will find varying ways into the still relatively new world of impact-first climate investing. The way that works for you will depend on what your exact interests are, where you are on the learning curve, and the degree of your ambition. But for any high-net-worth individual or family office wanting to take on one of the greatest challenges of our time—and to assume some risks or forgo some returns to do so—impact-first investing provides a way to catalyze change beyond what might have once seemed possible.

The authors thank Kate Collins formerly a manager at Bridgespan, for her invaluable contributions.

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