The Case for Spending Down a Charitable Foundation

Author: 
John Fullerton

“Have things become so critical – both in terms of the scale of the challenges we face but also the possibility of change – that this radical step [of spending down our assets over the next ten to fifteen years] is a good move?”

This is the question recently put to the advisor of a foundation deeply concerned about the environment, which he in turn shared with a few of us immersed in the sustainability crisis. It’s a question of great importance and great urgency.

Before getting to a “yes” or “no” response (mine will be a qualified “yes”), it’s important to say up front that I fully understand that tackling the environmental crisis is not the explicit mission of every foundation. Nevertheless, I believe there is a compelling case to be made, now more than ever, for more foundations to focus on the environment, and for foundations targeting the environment to effectively go “all in” with great urgency.

I do not intend to minimize the courage it will take on the part of foundation leaders to embrace this commitment nor how difficult it will be to execute. Whether “all in” translates into spending down over a particular time period is of secondary importance to fully embracing this bold strategy. Decisions about how quickly to spend down assets for environmental goals will vary depending upon alternative capital deployment strategies.

The case for “all in” depends first and foremost on two judgments. First, does the foundation board find the scientific evidence pointing to meaningful near-term risk of potentially catastrophic climate change impacts (extreme droughts and floods, food crises, cities flooded due to rising sea levels) compelling enough to ground a philanthropic strategy on it? If the answer is “yes,” then a strong argument can be made that this issue will overwhelm the good efforts of many other charitable initiatives, and therefore should play a central role in philanthropic strategies. And second, can an individual foundation, or the philanthropic sector collectively, if properly focused, create a meaningful impact on the climate outcome?

In order to address the first question, it is important to keep in mind, as Professor Robert Nadeau who is about to publish a new book on the subject detailed to me, that the impacts of climate change have been accelerating much faster than scientific predictions anticipated as recently as ten years ago. What changed in the interim, with inadequate attention from the mainstream media, was a new appreciation within the scientific community for the non-linear nature of climate systems and an increased ability to model the behavior of those systems. In systems language, the power of the positive feedback loops—such as melting sea ice reducing the reflective capacity of the poles and causing more warming, which in turn causes more sea ice melt— is what caught the scientists by surprise.

Tragically, the new sense of urgency in the scientific community that we must achieve a 350 ppm CO2 target in twenty years or face irreversible large-scale changes in the climate system is wholly absent from the political debate in the United States on both sides of the aisle, and lacking in most corporate board room discussions. Given this deplorable lack of acknowledgement that time is running out on the part of a short-term-obsessed government and private sector, it is all the more critical that the philanthropic community step up to the plate with an “all-in” strategy to fill the leadership vacuum. To invoke systems’ language, a bazooka-scale, negative-feedback loop must now be introduced into the system to radically shift our present course.

Which leads us to my second question, does the foundation community have the financial wherewithal to create this impact? In the US alone, foundation assets now total $600 billion, and an estimated $41 trillion (yes, with a “T”) will transfer to the millennial generation over the coming decades. This financial wealth is built on and dependent upon healthy ecosystem function. Certainly the combined power of this capital, expressed as both outright grants (targeted at everything from policy work, to research and development, to illuminating the numerous promising solutions not yet on the mainstream radar) and high impact investments in the multitude of commercially ready solutions, could potentially break the inertia of business as usual. This power must be concentrated, laser like, on two parallel and complementary strategies at scale: 1) High tech - renewable energy technologies and infrastructure, and 2) High wisdom (to borrow a term from Alan Savory) - restoring the regenerative natural carbon sinks of the oceans, the forests, and the grasslands.

The economic system shift that could be catalyzed by this kind of courageous, large-scale investment and grant-making redeployment, and critically, the leadership and moral authority the foundation community would demonstrate through these actions, could be game changing. Why not a foundation president as “Time's Person of the Year?”

In financial language, the present value of the impact of initiating such a negative feedback loop before the permanently destructive positive feedback loops of climate systems take over is literally infinite. Deciding where to invest and deploy grants is hard and fraught with risks: the stakes are very high. When opportunities for catalytic impact emerge, oversized and highly concentrated bets are warranted. The longevity of the foundation should depend upon its opportunity set for impact, and the mix of grant versus investment choices to optimize impact. Strategy should be prioritized around opportunity selection, not foundation longevity, remembering there is certain risk in timidity.

In all likelihood, with investment return possibilities lower across the board, spending down the corpus will be inevitable in time. If my view on financial overshoot is correct, then the future value of financial assets is likely to be severely impacted for all but the most astute traders regardless of how and when we act on climate change. Such a reality makes the recycling of financial capital back into natural capital in the coming decade not only morally compelling, but a clever trade as well.

The stakes of this challenge overwhelm considerations of personal legacies, the permanence of individual human institutions, and the understandable and legitimate interests of professionals in the field. These concerns can be addressed creatively and productively. Furthermore, demonstrated excellence in high-impact integrated philanthropy and investment should attract resources from the numerous massive fortunes that will need to draw on capital recycling expertise. In nature, everything is recycled so that the whole system can continue to regenerate itself.

Revisiting my second question - can individual foundations make an impact - this is perhaps the key question for every governing board of all charitable foundations and for all stewards of financial capital to be asking. Let’s be clear. If the answer to my first question is “yes,” that material climate change risk does exist, then we need all hands on deck. We must call on all stewards of financial capital to develop a strategy, directly or with their delegated authority, to meaningfully participate in the great challenge of civilization, what Thomas Berry called “The Great Work:” economic system transformation.

What could be a higher purpose of capital?