Engage equity. Deny debt.
That’s essentially the climate investing strategy of the Sierra Club Foundation, an approximately $200 million endowment that provides operating income for the Sierra Club and sees itself as a demonstration of what has come to be called “system-level investing.”
In that role, Sierra Club Foundation has broken with the environmentalist orthodoxy of divestment from public equities of fossil fuel producers and suppliers. Research suggests that divestment may soothe anxious consciences but does little to decarbonize companies or countries. Instead, the foundation is seeking ways to engage – and pressure – companies in which it owns stakes, including through its holdings in passive index funds that may include oil and gas producers.
In June, the Oakland-based foundation dropped BlackRock’s Aperio unit as an asset manager, citing BlackRock’s “refusal” to address climate risks in its investment and stewardship decisions. Sierra Club foundation had approximately $10.5 million in an Aperio low-carbon index fund.
BlackRock completed its acquisition of Aperio in 2021. Since then, BlackRock has reduced its support for shareholder proposals linked to environmental and social issues. In January, BlackRock pulled out of the Net Zero Asset Managers Initiative, a climate-focused group of more than 300 managers with $50 trillion in assets, amid growing pressure from Republican politicians.
“Soon after Aperio got bought by BlackRock, we had calls with them and asked if being purchased by BlackRock would change their overall commitment to what we cared about,” Dan Chu, the foundation’s executive director, told ImpactAlpha. “Eventually, we became concerned that BlackRock and Aperio were engaging, but they weren’t necessarily voting shares the way we would’ve liked to see them vote.”
In its fixed-income holdings, by contrast, the foundation is seeking to exclude and isolate providers of debt capital for the expansion of oil and gas production, with the aim of increasing the cost of capital and making fossil fuels increasingly uncompetitive against the falling price of renewable energy.
Sierra Club Foundation expects to be an early investor in the Bloomberg Cambridge University fixed income index to be launched next year. The index is one of the first to be based on decarbonization performance. The index could include, for example, fossil fuel companies that are no longer expanding and are phasing down in alignment with the Paris climate accord.
“Part of what I’m trying to do, is to say, ‘Actually, the divestment movement is more effective on the fixed-income side of the balance sheet,’” says Sara Murphy, who joined the foundation in August as director of system-level investing and head of the Shifting Trillions initiative, which seeks to change the investment equation for decarbonization. “On the debt side, you actually try to increase the cost of capital for system-harming activities.”
Proxy voting
The Sierra Club Foundation acts as the fiscal sponsor and major funding source for the Sierra Club, the venerable environmental organization that has recently suffered a steep drop in membership and resources. The club in August fired its executive director, Ben Jealous, a former leader of the NAACP and the Sierra Club’s first Black executive director.
To amplify its shareholder voice, Sierra Club Foundation is working with partners on a “pre-declaration” platform to announce its votes on resolutions that touch on system-level issues. The platform would skirt legal attacks on what US Rep. Jim Jordan, chair of the House Judiciary Committee, has called a “climate cartel.” The committee last year threatened more than a dozen financial institutions with legal action over what it said was illegal collusion in pushing for decarbonization and “net zero” goals.
The administration has also gone after the proxy advisors like ISS and Glass Lewis that pension funds and other large asset owners rely on to vote across thousands of holdings.
“There’s no coordination,” Murphy said of the new effort. “Think of it as a big pre-declaration platform – ‘We’re going to vote this way. This is how it looks. If you want to, too, you can.’ Anybody can choose to do it if their fiduciary judgment leads in that direction.”
Before its acquisition by BlackRock, Aperio had carved out a role as a provider of customized ESG-aligned investment portfolios. In 2020, BlackRock CEO Larry Fink had argued in his annual letter that physical and transition risks associated with climate change pose a structural threat to long-term investment returns. In May 2022, Sierra Club Foundation voiced concerns that its votes on key shareholder resolutions no longer fully reflected such environmental concerns.
“We sent them a watch letter, which basically said, ‘Hey, here are some of the concerns we have,” Chu said. After the 2024 election, “We saw some troubling messages from BlackRock basically backtracking from what we thought was Larry Fink’s commitment to addressing climate change as an asset manager.”
Last month, New York City Comptroller Brad Lander recommended the city’s pension funds re-bid BlackRock’s public equities mandates. In September, the Dutch pension fund manager PGGM announced that it had declined to renew its contract with BlackRock for a much larger mandate – $17 billion – citing its own sustainability ambitions. PGGM also ended a similar mandate with the UK-based asset manager LGIM.
Sierra Club Foundation selected women-led asset management firms Nia Impact Capital and Black-led Xponance to manage its public equities. The two firms won the mandate in part because of their focus on client-first and sustainable investing, but also because of the Sierra Club Foundation’s growing commitment to racial equity in its portfolios, as well as working with more diverse-led asset management firms.
“Our board made a commitment to diversify our portfolio as it relates to having more representation of BIPOC and women-led funds in our public equities,” Chu says. “We firmly believe that when firms have a good track record and a diverse set of leadership that they actually perform better over time.”
Nia Impact, an Oakland-based firm with $500 million in AUM, has made a name for itself taking on Tesla over issues of workplace harassment and compulsory arbitration for employee disputes.
“They’re very engaged in companies, as well as voting on their shares,” Chu says. “They’re also aligned with us on a lot of the ESG elements that we care deeply about, and their track record has shown consistent performance as well.”
Universal owners
The Bloomberg Cambridge University fixed income index is based on the work of Cambridge professor Ellen Quigley, whose work has focused on the role of “universal owners” in considering system-level risks that go beyond any individual company or investment. Climate change represents one such “un-hedgeable, systemic risk,” Sierra Club’s Ben Cushing wrote in June. He said climate change could cause global stock values to plummet by 40% by mid-century.
Some institutional investors have long adopted such system-level thinking; more recently, many individual investors with 401(k) and other accounts spread across diversified index portfolios have come to realize that system-level effects will have a greater impact on their returns than simple stock-picking.
Murphy, who moved to the Sierra Club Foundation from the nonprofit Shareholder Commons, has long been a proponent of “beta stewardship” in order to manage the negative impacts of particular holdings on investment portfolios more broadly (for background see, “Chasing alpha is fine, but long-term returns for universal owners require beta stewardship”).
A review of the Sierra Club Foundation’s investment strategies traces its evolution to what it calls Total Portfolio Activation, “treating an entire investment portfolio—across asset classes and time horizons—as a tool for advancing systemic vitality.”
The foundation holds private equity stakes in funds including Illumen Capital II, a majority Black-owned fund of funds that invests in health and wellness, financial inclusion, and climate and sustainability, and Spring Lane Sustainable Infrastructure II, which focuses on sustainable energy, food, waste, water and transportation. The foundation has acted as a reference for Include Ventures, a Black woman-owned fund of funds primarily investing in Black-owned venture funds.
The foundation has carved out 5% of its endowment to create its Catalytic Capital Impact Fund, which uses equity, debt, loan guarantees and recoverable grants to accelerate climate action and also advance, racial, economic and environmental justice. Typical check sizes for investments range between $500,000 to $1 million.
Through its Catalytic Capital Impact Fund, the foundation has backed Navajo Power, a B-Corp. that works with Native-owned organizations to develop utility-scale clean energy projects (see, “Navajo Power is building a pipeline of utility-scale solar projects to model a just climate transition”). It has a $1 million equity investment in Urban Ingenuity’s Working Power Impact Fund, which invests in clean energy projects co-owned by communities.
The fund has acted as a guarantor in Locus Impact Investment’s Community Investment Guarantee Pool, which is backed with philanthropic funding to provide financial guarantees for community finance intermediaries to catalyze financing for affordable housing, small businesses and climate resilience.
In his article, “The Long Term Will be Decided Now,” Sierra Club’s Cushing made the case that investors must treat climate change not just as a risk to individual companies, but as a threat to the whole economy and to long-term portfolio returns.
The Sierra Club Foundation, he said, “is setting a strong example for other institutional investors by better aligning its assets with its mission and fiduciary responsibility in the face of mounting systemic risks.”
