UK Endowments Embrace Private Markets for Climate Investment

Strange as it may seem, endowment funds and private markets go back a long way. Endowments and foundations (E&F) in the US began exploring the terrain of alternative assets back in the 1970s. Harvard’s endowment fund and the Ford Foundation were prominent pioneers. This US model of endowment investing tends to differ from the one across the pond. Endowments in the UK historically preferred their fixed income and equity-tilted portfolios. Now, a search for climate solutions is making convergence more likely. Simon Hallet, head of climate strategy at Cambridge Associates, told Net Zero Investor more about an emerging E&F appetite for climate-driven private market investment. Structural shift As residents of the wider asset owner universe, endowments and foundations tend to play by slightly different rules. While pension fund footprints in climate solutions are often tied to risk and return, E&Fs are more flexible. “In the E&F market, you have organisations that have a higher degree of flexibility (compared to pension schemes) in what they do. Their liabilities are not defined by an actuary. They tend to be defined by intent”, Hallet says. That intent, Hallet reckons, is now being sharpened. Particularly, on the climate front. Internally, governance structures are changing in response. “10 years ago, grant giving and investment committees didn’t really speak to each other. Now, we are seeing organisations bring the two together. This has prompted news ways of thinking on the climate solutions side”, he explains. Governance aside, E&F climate strategies are a function of incentives. Perpetual endowments for instance, share a common incentive with their pension fund counterparts – both make decisions in the interests of future generations. A mix of intent, governance and incentives has shaped the sector’s demand for climate-driven investment. “There is definitely a trend to create more space in E&F asset allocation for dedicated exposure to climate solutions”, notes Hallet. Private markets That interest in climate strategies, is headed for private markets. Hallet recalls the US endowment model, stressing that endowments are no strangers to investing in private markets. “The US model of endowment investing takes a long-term view and embraces private markets. E&Fs were some of the first investors in VC back in the 1970s”, he explains. Now, he sees the UK’s E&F investors moving in that direction. Climate solutions, he says, are the reason why. In addition to a more obvious factor: returns. “E&Fs are looking at the higher end of the return spectrum. They’re thinking about deploying small amounts of money and generating a decent return. So that’s driving an interest in private markets”, he says. E&Fs are also a distinct type of asset owner, in that they are known to think beyond the returns box. Three Sainsbury Family Trusts, for example, collectively operate the Climate Change Collaboration (CCC). Among other things, the CCC is involved in a decade-long movement to advocate for fossil fuels divestment. “The focus for the CCC Trusts has evolved to place a greater emphasis on initiatives which enable investment in climate and nature solutions”, says a filing from Mark Leonard Trust, one of the CCC members. Impact, in other words, matters a great deal That leads E&Fs to prefer very focused strategies. Private markets offer that in relative abundance. “In private markets, they can channel funds to strategies that are very focused. Something that is hard to do in public markets”, commented Hallet. To some, dealing with private markets, and managers thereof, will be familiar territory. The University of Cambridge endowment fund, for example, has been working with its private market managers to improve reporting and decarbonisation targets. The endowment’s disclosures show that in 2023, one of its managers became the world’s first private equity firm to set a science-based portfolio coverage target for absolute emissions. If Hallet is right, these are signs of things to come. In 2026, E&Fs in the UK will start resembling their American counterparts. A convergence in private market appetites is underway, fuelled by a willingness to invest in climate solutions.