The endowment model was built for institutions that think in decades. Climate change is now forcing those same institutions to prove that they actually can.
For more than a generation, the modern endowment model has rested on a powerful premise: investors with perpetual horizons, stable spending needs, sophisticated governance, and tolerance for illiquidity can earn superior long-term returns by diversifying beyond public stocks and bonds. That premise remains relevant, but it is no longer sufficient. A climate-constrained world changes the investment problem. It does not merely add a new “ESG screen” to an otherwise familiar portfolio. It alters the opportunity set, the risk map, the liquidity profile, the meaning of diversification, and the social license of long-horizon capital.
Climate risk is a compound system of physical risk, transition risk, liability risk, policy risk, technology risk, geopolitical risk, and reputational risk. It touches public equities, private equity (PE), venture capital (VC), real assets, infrastructure, credit, sovereign debt, hedge funds (HF), commodities, insurance, philanthropy, and the operating footprint of universities and foundations themselves.
The central question for endowments is therefore not whether they should “do climate.” The question is whether their investment model is still fit for purpose when the world in which capital is deployed is physically warming, politically fragmenting, technologically electrifying, and financially repricing.
The answer is nuanced. The endowment model’s best features—long horizon, governance discipline, access to private markets, ability to fund innovation, and willingness to tolerate near-term tracking error—are precisely the features needed for climate-aware capital allocation. In a climate-constrained world, endowments must evolve from allocators of illiquidity premia into stewards of transition intelligence.
The traditional endowment model emerged in a world where access was scarce. A university or foundation with a perpetual horizon could harvest return streams unavailable to short-horizon investors: illiquidity premia, complexity premia, manager alpha, and diversification benefits. The logic was reinforced by institutional spending rules. Endowments are intergenerational funding mechanisms. They must support current students, faculty, research, scholarships, museums, hospitals, and community commitments while preserving purchasing power for future beneficiaries. The investment portfolio is therefore inseparable from institutional mission.
The FY2025 NACUBO-Commonfund Study covered 657 U.S. higher education institutions and affiliated foundations representing $944.3 billion in endowment assets. The median endowment was $253.6 million, and participating institutions withdrew $33.4 billion from endowments during FY2025, an 11.0% year-over-year increase. The study reported an average FY2025 net return of 10.9% (NACUBO & Commonfund Institute, 2026).
This is the first key point: endowments are already risk assets. Their public communications often emphasize permanence, prudence, and stewardship, but their portfolios are built on a substantial equity-risk and alternatives-risk foundation. The question is whether they are taking the right risks for the world ahead.
Academic work on the endowment model supports the core logic of illiquid allocation, while also clarifying its limits. Dimmock et al. (2024) develop a dynamic portfolio choice model for illiquid alternative assets and show that liquidity diversification—using multiple illiquid assets with staggered lockups—can increase allocations to alternatives and improve investor welfare. The same framework also shows that lockups, secondary-market transaction costs, crisis states, and unspanned risks can create endogenous, time-varying rebalancing constraints. In other words, illiquidity is a risk system to govern (Dimmock et al., 2024).
That matters because climate risk is not conveniently liquid. Many climate exposures sit inside private assets, infrastructure concessions, real estate, timberland, energy systems, supply chains, and long-duration projects. The endowment model’s comparative advantage—access to illiquid assets—can become a vulnerability if the underwriting of those assets is blind to climate constraints.
The Climate Constraint Is Now a Financial Constraint
Climate change has moved from environmental externality to macro-financial condition. The World Meteorological Organization (WMO)’s State of the Global Climate 2025 confirms that 2015–2025 were the hottest eleven years on record and that 2025 was the second- or third-warmest year on record, at about 1.43°C above the 1850–1900 average (WMO, 2026). Copernicus reported that 2024 was the warmest year in records going back to 1850 and the first calendar year to exceed 1.5°C above the pre-industrial level, with a global average temperature of 15.10°C, or 1.60°C above the 1850–1900 estimate (Copernicus Climate Change Service, 2025).
A single year above 1.5°C does not mean the Paris Agreement’s long-term threshold has formally been breached. The Paris temperature goal is generally interpreted over longer averaging periods, but the signal is economically relevant. Bevacqua et al. (2025) find that, absent very stringent mitigation, the first year above 1.5°C is likely to occur within the 20-year period that reaches the same warming level. For long-horizon investors, it suggests that climate thresholds once discussed as distant possibilities are becoming part of the investable horizon (Bevacqua et al., 2025).
For an endowment, this changes the baseline. Climate risk is no longer only a long-tail, late-century, ethical issue. The question is “How do climate hazards, policy responses, insurance costs, technology adoption, energy security, disclosure rules, litigation, and capital flows affect cash flows over the next committee cycle, fund life, spending period, and generation?”
Climate risk has two broad channels. Physical risk refers to damage from heat, drought, fire, flood, storms, sea-level rise, water stress, disease vectors, and other climate-linked hazards. Transition risk refers to repricing caused by the move toward lower-carbon systems: regulation, carbon pricing, technology substitution, consumer preferences, financing constraints, and stranded assets (Zhong, 2024). A disorderly transition may raise near-term policy and market risk. A failed transition may raise physical risk. A delayed transition can produce both: more severe warming and sharper eventual policy adjustment.
The Network for Greening the Financial System scenarios capture this interaction by providing harmonized transition pathways, physical climate impacts, and macro-financial indicators. Its current-policies scenario indicates that, without further climate policies, global warming could reach 1.5°C in the 2030s, 2°C around 2050, and 3°C around 2100 (Network for Greening the Financial System [NGFS], 2025).
Climate-Aware Endowment Process
Investment committees are rightly skeptical of models. A prominent 2024 Nature paper on economic damages from climate change was retracted in 2025 after the authors found that results were sensitive to the removal of one country. For investors, the lesson is that climate risk management must be robust to model uncertainty (Kotz et al., 2025).
Endowments should not anchor policy portfolios to a single damage function, temperature pathway, or vendor score. They should ask: “What if physical risks are underpriced? What if transition risks arrive abruptly? What if both occur at once? What if public markets price climate risk faster than private markets? What if insurance withdrawal becomes the transmission mechanism from climate hazard to asset impairment? What if policy fragmentation creates regional winners and losers?” A serious climate-aware endowment process builds a portfolio that can survive multiple futures.
Look for Three Categories of Mispricing
One of the most important debates in climate finance is whether markets are pricing climate risk. The answer appears to be: partially, inconsistently, and with meaningful variation by asset class, region, data quality, and time horizon.
Bolton and Kacperczyk (2021) find evidence consistent with investors demanding compensation for carbon emission risk, including a “carbon premium” associated with higher emissions. They also find evidence of institutional investors using exclusionary screening based on direct emission intensity in some industries (Bolton & Kacperczyk, 2021).
Aswani et al. (2024) re-examine emissions-return relationships and argue that some documented associations are sensitive to data-vendor estimation methods and research design choices, especially the use of unscaled emissions. Their critique is important for endowments because many climate dashboards create a false sense of precision. If emissions data quality is weak, portfolio decisions based on that data can become fragile (Aswani et al., 2024).
A recent meta-analysis in Energy Economics, incorporating 1,389 estimates from 70 primary studies, finds that climate risk has significant but heterogeneous financial effects across markets, investment behavior, and financial stability. The paper emphasizes that climate-risk pricing remains controversial and that results differ by measurement choices, risk type, and market segment (Yang & Geng, 2025).
For endowments, the implication is practical: do not assume markets are efficient with respect to climate risk, and do not assume they are completely inefficient either. A climate-aware endowment should look for three categories of mispricing.
- First, underpriced physical risk. This is most relevant in real estate, infrastructure, municipal bonds, agriculture, timber, insurance-linked assets, and location-specific credit. Climate hazards are local, but diversified portfolios often aggregate them into broad asset-class buckets. “Real assets” is not a risk factor. A coastal multifamily property, a regulated electric utility, a timberland portfolio, a toll road, and a data center exposed to water stress do not share the same climate risk.
- Second, underpriced transition risk. High-emitting assets may generate strong near-term cash flows but face terminal-value compression if policy, technology, or financing conditions change. Semieniuk and colleagues (2022) estimate that global stranded assets, measured as the present value of future lost profits in upstream oil and gas, exceed US$1 trillion under plausible changes in expectations about climate policy. The precise number is less important than the mechanism: once expectations shift, assets whose value depends on long-lived fossil demand can reprice quickly (Semieniuk et al., 2022).
- Third, underappreciated adaptation demand. Climate investment is not only mitigation. A warming world also requires resilience: cooling, water, flood defenses, grid hardening, wildfire mitigation, agricultural adaptation, insurance analytics, emergency infrastructure, and resilient housing. Endowments that define climate solely as decarbonization risk missing one of the most important investment themes of the next several decades.
Endowment Portfolios: Climate Transition Is Reallocation of Capital
The climate transition is a multi-decade reallocation of capital across energy, transport, buildings, industry, agriculture, data, finance, and public infrastructure. The International Energy Agency (IEA)’s World Energy Investment 2025 report describes the onset of an “Age of Electricity.” Investment in the electricity sector is set to reach over US$1.5 trillion in 2026, approximately 50% higher than total spending on bringing oil, natural gas, and coal to market. Solar investment is expected to reach US$450 billion, making it the largest single item in the IEA’s inventory of global energy investment spending. Global spending on batteries for power-sector storage is set to reach US$66 billion, while grid investment remains around US$400 billion annually, below what is needed to keep pace with power demand and renewable deployment (IEA, 2025).
This has major implications for endowment portfolios. Public equities provide liquid exposure to electrification, semiconductors, grid equipment, industrial automation, building efficiency, electric mobility, software, and materials. However, public equity indices may concentrate climate-transition exposure in a small number of mega-cap technology and industrial names, creating hidden factor risk.
- PE can finance industrial decarbonization, efficiency services, electrified heat, waste-to-value, circular economy models, and supply-chain transformation, but PE underwriting must be explicit about carbon costs, energy inputs, regulatory pathways, exit multiples, and buyer universe. A 10-year fund life is long enough for climate assumptions to matter.
- VC can fund frontier climate technologies, but endowments must distinguish climate science from climate business models. Technologies such as long-duration storage, carbon removal, green hydrogen, advanced geothermal, industrial heat, nuclear innovation, and low-carbon materials may be essential to transition pathways, but not every essential technology becomes an attractive venture-scale investment.
- Infrastructure may be the most natural climate asset class for endowments: grids, transmission, storage, renewable generation, ports, water systems, district energy, data centers, public-private resilience infrastructure, and transport electrification. Yet infrastructure also concentrates physical risk. The underwriting question is no longer only contracted cash yield; it is climate-adjusted durability.
- Real estate must move from energy-efficiency checklists to full climate-resilience underwriting. Location, insurance availability, cooling demand, flood risk, fire risk, building codes, tenant preferences, and capex requirements will increasingly drive value. A “green building” in an uninsurable or water-stressed location is not necessarily a climate-resilient asset.
- Natural capital and biodiversity are also becoming investable themes, but they require careful governance. The Taskforce on Nature-related Financial Disclosures (TNFD) released final recommendations in 2023 to help companies and financial institutions identify, assess, manage, and disclose nature-related dependencies, impacts, risks, and opportunities (TNFD, 2023). This matters because climate risk and nature risk are increasingly inseparable: water, forests, soil, biodiversity, and ecosystem services are all inputs into long-term economic value.
Segment the Climate Finance Gap
Climate finance is growing rapidly, but not evenly. Mitigation finance dominated 2023 flows at US$1.78 trillion, while adaptation finance reached only US$65 billion, with another US$58 billion in dual-benefit finance (Climate Policy Initiative, 2025). For endowments, the underfunding of adaptation, resilience, and emerging-market (EM) transition finance may create investment opportunities where catalytic capital, blended finance, guarantees, concessional layers, or specialist manager access can improve risk-adjusted outcomes. Many climate needs sit in public goods, weak-credit jurisdictions, regulated utilities, low-income households, or infrastructure with complex political risk. Endowments should segment the gap. Some opportunities belong in market-rate portfolios. Some belong in program-related investments. Some belong in donor-funded catalytic pools. Some belong in university research commercialization. Some belong in public policy, not portfolios.
An endowment should ask: which climate problems are investable at market rates, which require catalytic capital, and which align with the institution’s mission even if they do not maximize risk-adjusted return?
Include Both Divestment and Engagement
The climate debate in endowment governance has often collapsed into divestment versus engagement:
- Divestment can reduce exposure to assets believed to face poor long-term economics, high stranded-asset risk, or unacceptable mission conflict. It can also reduce institutional reputational risk and clarify values. But divestment can be blunt. It may transfer ownership to less transparent investors. It may reduce access to information. It may be difficult to implement in commingled private funds. And if framed purely as moral action, it may avoid the harder work of portfolio construction.
- Engagement can influence corporate behavior, improve disclosure, and support transition planning. Ilhan et al. (2023) find that institutional investors value and demand climate-risk disclosures, and that climate-conscious institutional ownership is positively associated with better firm-level climate-risk disclosure. That evidence supports engagement as a financial-information tool (Ilhan et al., 2023). However, engagement without escalation can become a process substitute for outcomes. Investors should define what success looks like: credible transition plans, capital expenditure alignment, methane reduction, board competence, climate-lobbying consistency, asset-retirement schedules, or disclosure quality. If a company repeatedly fails those tests, engagement should have consequences.
A mature endowment policy should include both divestment and engagement. The right framework is allocate, avoid, engage, escalate, replace, and report. Allocate to climate solutions and resilient assets where expected returns justify risk. Avoid assets whose economics depend on assumptions incompatible with plausible policy, technology, or physical-risk pathways. Engage with companies and managers where ownership can influence value-relevant behavior. Escalate when progress stalls. Replace managers who cannot underwrite climate risk. Report transparently to stakeholders.
Climate-Aware Endowment Management Is a Governance System
The most common implementation mistake is to treat climate as a product-selection exercise. Add a low-carbon equity fund. Add a green bond allocation. Add a climate venture sleeve. Publish a carbon footprint. Declare progress. In fact, a climate-aware endowment needs five governance capabilities.
- Climate literacy at the investment committee level. Trustees do not need to become climate scientists, but they must understand the difference between physical and transition risk, carbon footprint and forward-looking alignment, emissions intensity and absolute emissions, avoided emissions and offsets, mitigation and adaptation, financed emissions and operational emissions, and scenario analysis and forecast.
- Mandate clarity. The investment office must know whether climate objectives are purely financial, mission-aligned within financial constraints, or partly concessionary. Ambiguity creates conflict. A university cannot ask its investment office to maximize returns, avoid reputational controversy, decarbonize rapidly, increase distributions, preserve liquidity, and never underperform peers without acknowledging trade-offs.
- Risk-budget integration. Climate risk should sit inside the total portfolio risk system, not in a sustainability appendix. The endowment should track climate exposure across asset classes, sectors, geographies, managers, liquidity buckets, and time horizons. A portfolio can have a low reported public-equity carbon footprint while owning high-carbon assets through private funds, infrastructure, credit, or real assets.
- Manager underwriting. External managers are the transmission mechanism of endowment policy. Every manager due diligence process should include climate competence: data quality, sector expertise, physical-risk tools, transition assumptions, stewardship process, governance, reporting, and escalation. For private markets, limited partners should assess whether general partners price carbon costs, energy inputs, insurance, regulation, permitting, technology substitution, and exit risk.
- Disclosure architecture. IFRS S1 is effective for annual reporting periods beginning on or after January 1, 2024, and requires disclosure of sustainability-related risks and opportunities useful to users of general-purpose financial reports. IFRS S2 sets out climate-related disclosure requirements and builds on the recommendations of the Task Force on Climate-related Financial Disclosures while incorporating industry-based disclosure requirements derived from SASB Standards (IFRS Foundation, 2023a, 2023b). Even where endowments are not directly required to report under these regimes, their managers, portfolio companies, donors, regulators, students, and counterparties increasingly operate in that disclosure environment.
Rebuild the Policy Portfolio for A Climate-Constrained World
The classic policy portfolio asks: what mix of asset classes best meets the institution’s return objective, risk tolerance, spending needs, and liquidity constraints?
The climate-aware policy portfolio adds five questions.
- What assets are vulnerable to physical impairment under plausible warming pathways?
- What assets are vulnerable to transition impairment under plausible policy and technology pathways?
- What assets benefit from adaptation, mitigation, resilience, and electrification demand?
- What liquidity is required if climate shocks coincide with market drawdowns, donor stress, enrollment pressure, or capital calls?
- What reputational or mission risks could impair the institution even if portfolio-level returns appear acceptable?
The public equity portfolio should be analyzed for transition sensitivity, not just sector weights. A software company serving electric utilities may be a climate-enabling asset. A low-emissions company with fragile water exposure may not be. Passive benchmarks should be stress-tested for concentration in high-energy-demand AI infrastructure, semiconductor supply chains, and grid constraints.
The fixed income portfolio should incorporate climate into credit analysis. Municipal bonds, sovereign bonds, utilities, insurers, real estate credit, and project finance are all climate-sensitive. Credit spreads may not fully reflect future adaptation capex, tax-base erosion, disaster recovery costs, or insurance withdrawal.
The PE portfolio should require manager-level climate underwriting. General partners should show how climate assumptions enter diligence, value creation, capex planning, procurement, energy strategy, insurance, and exit. For buyouts, climate is increasingly an operational value lever. For growth equity, it can be a market expansion thesis. For distressed assets, it can be a trap.
The VC portfolio should separate climate impact from venture return potential. Climate technology can be capital intensive, policy dependent, slow to commercialize, or exposed to commodity cycles. Endowments with access to top-tier science, engineering, and commercialization networks may have an edge, but only if they marry technical diligence with market discipline.
The real asset portfolio should be physically mapped. Flood, fire, heat, wind, water stress, and insurance data should be tied to each asset’s expected hold period and capex plan. The analysis should include not just “is the asset exposed?” but “who pays, when, and through what mechanism?”
The HF portfolio should identify climate-relevant strategies beyond ESG labels: catastrophe risk, commodities, power markets, weather derivatives, carbon markets, relative value in utilities, policy arbitrage, and transition-driven dispersion. But these strategies require deep controls because climate-linked markets can be crowded, policy-sensitive, and technically complex.
The cash and liquidity portfolio should be sized for both market and mission stress. Climate shocks can affect endowment portfolios and university operations at the same time. A wildfire, flood, heat emergency, or insurance shock can impair assets, raise expenses, disrupt enrollment, damage facilities, and trigger liquidity needs.
Case Study: Rebuilding a Policy Portfolio After the PG&E Wildfire Shock
A practical climate-aware policy-portfolio case is California’s 2017–2019 wildfire and utility-liability cycle. The 2018 Camp Fire destroyed more than 18,000 structures and became California’s deadliest and most destructive wildfire on record. PG&E later faced roughly $30 billion of potential wildfire liabilities and entered Chapter 11 bankruptcy protection in 2019. Its share price fell from roughly $70 before the 2017 North Bay fires to about $7 around bankruptcy.
Assume a $10 billion university endowment with a traditional policy mix: 35% public equity, 15% fixed income, 20% private equity, 10% venture capital, 10% real assets, 5% hedge funds, and 5% cash.
A climate stress test identifies four exposures:
| Exposure | Assumption | Portfolio loss |
| Utility equity liability risk | $45m exposure × 90% loss | $40.5m |
| Climate-sensitive credit | $200m × 12% spread/duration loss | $24.0m |
| Real assets physical impairment | $600m × 15% haircut | $90.0m |
| PE transition impairment | $500m × 20% haircut | $100.0m |
| Total climate add-on stress | $254.5m / 2.55% |
Liquidity also becomes a policy issue. If annual spending is $500m, private-market capital calls are $350m, and climate-related operating reserves are $150m, the endowment needs $1.0bn of liquidity. With only 5% cash, or $500m, it faces a $500m shortfall, potentially forcing asset sales during stress.
A redesigned climate-aware allocation might shift to 30% public equity, 18% fixed income, 17% PE, 8% VC, 12% real assets, 5% hedge funds, and 10% cash. It would reduce unmanaged utility, credit, real-asset, and PE transition exposure while increasing liquidity and resilience-oriented infrastructure.
Under revised assumptions, climate add-on stress falls from $254.5m to about $75m, reducing downside by $179.5m. The conclusion: climate-aware portfolio design is not about abandoning the endowment model. It is about underwriting illiquidity, credit, real assets, and liquidity against physical and transition risk.
A Practical Operating Model
A climate-aware endowment can start with a 12-month operating plan.
- In the first quarter, establish governance. Define whether climate integration is pursued as financial risk management, mission alignment, stakeholder accountability, or some combination. Approve climate beliefs: what the committee believes about physical risk, transition risk, market pricing, policy uncertainty, and the institution’s comparative advantages. Set decision rights between trustees, investment staff, consultants, and managers.
- In the second quarter, map exposures. Build a total-portfolio climate inventory across public and private assets. Include emissions, physical risk, transition sensitivity, geographic exposure, manager capability, liquidity, and data confidence. Do not wait for perfect data. Label uncertainty explicitly.
- In the third quarter, stress-test the portfolio. Use at least three scenarios: orderly transition, disorderly transition, and hot-house or current-policies pathway. The point of the exercise is not to produce a single expected return. It is to identify vulnerabilities, liquidity pinch points, and assets whose risk-reward profile changes across scenarios.
- In the fourth quarter, revise policy. Update investment policy statements, manager due diligence templates, side-letter priorities, reporting requirements, engagement expectations, and exclusion criteria where appropriate. Define portfolio-level metrics: financed emissions, transition alignment, physical-risk exposure, climate-solutions exposure, adaptation exposure, liquidity under stress, and manager reporting coverage.
The second year should focus on implementation: rebalance public markets, adjust private pacing, upgrade manager rosters, add climate solutions only where underwriting is strong, develop a stewardship escalation policy, and publish a credible annual climate investment report.
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