John D. and Catherine T. MacArthur Foundation, Chicago, announced plans to divest from fossil fuels.
The $8.2 billion foundation's commitment to a "pathway to divest" will begin within the next month when the foundation changes the U.S. indexes it uses in its portable alpha program, said John Palfrey, president of the foundation, in an interview.
The program, in which the foundation uses derivative instruments to achieve long-only equity exposure, will switch to ESG indexes that exclude companies with fossil-fuel reserves from broad equity indexes. Mr. Palfrey said the change for its U.S. equity exposure will occur sometime in the next month, and the goal is to change the non-U.S. equity indexes within the next year.
He did not provide further information on the size of the portable alpha program, but he said it runs "in the billions."
"We have been for a number of years exploring the easiest way, consistent with our fiduciary duty to align our endowment" with the foundation's mission and charitable programs, Mr. Palfrey said.
The foundation's board established an ad hoc committee over the past 18 months and hired Cambridge Associates to conduct a study on the best way to approach divestment.
Mr. Palfrey noted the foundation in 2019 had already stopped investing in private energy funds that invest in oil and gas exploration and is allowing existing funds to which it is invested to wind down.
Further information on the new index was unavailable, but Mr. Palfrey did comment on the irony of paying higher fees for an index that has fewer securities than a broad index fund.
He noted the debate in the investment committee was whether it was consistent with the foundation's fiduciary duties to pay more to have exposure in fewer securities.
"It is totally consistent with our fiduciary duties," Mr. Palfrey said.
Also in an announcement on the foundation's website Wednesday, among the foundation's $500 million target allocation to impact investments is a commitment to Encourage Solar Finance, a private equity fund managed by Encourage Capital that invests in specialized financial institutions in India that develop solar finance solutions.
As of Dec. 31, the foundation had made $359 million in commitments. Of those, 47% were private equity commitments, 39% loans and 14% guarantees.
