On January 9th, Wall Street Journal blogger Veronica Dagher posted an article
highlighting the opportunity for philanthropic donors with Donor
Advised Funds (DAFs) to create a “double bottom line.” Dagher points out
that donors at large national funds, such as Schwab, are increasingly
looking not only to create social impact by spending their money in the
social sector, but also by investing their money to create a positive
impact through impact investing. Like Dagher, we see this as a
promising trend, however, we have noticed that large national providers
are not the only organizations providing donors with the opportunity to
make impact investments. Some community foundations are also excited by
this trend and provide donors with opportunities to invest their DAF
dollars to create positive social impact while still earning a return on
their investment.
What exactly is impact investing?
Impact investing can reference a wide range of activities. In a 2012
report entitled “Impact Investments an Emerging Asset Class” JP Morgan
defined impact investing:
Impact investments are investments intended to create positive
impact beyond financial return. As such, they require the management of
social and environmental performance (for which early industry standards
are gaining traction among pioneering impact investors) in addition to
financial risk and return. We distinguish impact investments from the
more mature field of socially responsible investments (“SRI”), which
generally seek to minimize negative impact rather than proactively
create positive social or environmental benefit.
This definition is helpful in that it clearly separates impact
investing from SRIs and sets a higher bar for impact investors. It also
indicates a certain intentionality for the investment on behalf of the
donor and the intermediary providing the investment opportunity.
How are Community Foundations providing opportunities for impact investing?
We see impact investing as an exciting space for DAF donors to
increase the impact their philanthropic dollars can have. In 2007,
according to a Council on Foundations report
there was $31B nationally in DAF assets, almost half of that, $16.5B,
was invested in DAFs at community foundations. Community foundations
represent a major portion of DAF funds and therefore represent an
enormous opportunity for impact investing of DAFs. Through our work
with community foundations, we have seen that some innovative community
foundations are already starting to capitalize on the opportunity impact
investing represents.
The Greater Cincinnati Foundation
(GCF) is on the forefront and has been experimenting with impact
investing since 2002. The foundation looks for opportunities within the
community that offer compelling investment opportunities for specific
donors on a deal-by-deal basis. In 2011, GCF was involved with five
different community investment opportunities that involved seven
individual donors. The foundation looks for organizations within the
community that could benefit from loans or equity investments and
conducts a thorough due diligence process. It then takes the investment
opportunity to potential donors who it thinks might have an interest in
the investment. GCF will make investments alongside the donor and when
necessary will also provide grants to the organization to develop
capacity to accept the investment opportunity. GCF provides donor
outreach and education on impact investing to its donors to help them
understand the opportunity. In general, donors have seen a 1-2% return
on their capital through the community-based investment opportunities
generated through GCF. GCF sees its impact investing efforts as a way to
recycle its charitable capital.
In another example, Napa Valley Community Foundation
has provided individual donors with specific opportunities to make
impact investments in their communities. Christina Tucker and Diane
Miller outline the story of Napa Valley Community Foundation in a 2011
article titled “The Community Foundation, A Charitable Giving Vehicle for High-Net-Worth Individuals.”
Napa Valley had a donor who was interested in investing in a local
hospital but also had an interest in the environment. The Community
Foundation worked with the donor and a professional advisor to purchase a
gas congeneration power plant that turns natural gas into electricity
for the hospital. The power plant was purchased with a structured gift
of $500,000 and a zero-percent interest program-related investment. The
hospital can now meet more than 50% of its electrical needs and one
quarter of its hot water needs while reducing harmful emissions and is
paying back its loan with the money it is saving. Through impact
investing, the donor made an impactful contribution to the hospital and
the environment, and is also being repaid the program-related investment
so that money can be recycled into another investment.
Considerations for Community Foundations wanting to pursue impact investing
The community foundations that have been experimenting with impact
investing have seen a number of successful project completions and
provide some early leanings that can help drive success. These projects
indicate:
- It is best to have a controller, CFO, or other internal finance expert
involved in the process. Deals can be complex and require financial
expertise on the part of the community foundation in order to best
structure the opportunity.
- Developing a pipeline of opportunities within a community can be
challenging and community foundation staff will need to be willing to
devote time and resources towards developing this pipeline.
- It takes time to educate donors on the opportunities impact investing
offer. One-on-one conversations with donors about the advantages seem
to generate the greatest understanding and excitement on behalf of
donors.
For community foundations interested in impact investing, The
Rockefeller Foundation is currently working to develop a toolkit that
will incorporate lessons like these as well as others to help guide the
process.
In general, the impact investing opportunities we have heard about
through community foundations tend to be locally-based. In comparison
to many of the large national providers, many of these opportunities
through community foundations tend to be on a project-by project basis
rather than investment into larger more diversified funds. Donors at
community foundations therefore have the opportunity to impact specific
organizations within their communities while generating a financial
return and retaining their capital, but are unlikely to diversify their
risk across multiple projects.
At FSG, we are excited to see that both community foundations and
national providers, like Schwab, are offering their DAF donors
opportunities for impact investments. We think both fund models and
specific local projects are compelling vehicles to create change. The
field of impact investing offers donors a promising opportunity to
recycle capital into the social sector; given the $31B in donor advised
funds, we believe they hold a powerful opportunity to scale this market.
To learn more about impact investing and/or DAF funds please contact
Rebecca Graves or
Christine Kendall.