Philanthropic Investment Strategies

Philanthropists can employ a whole host of strategies to accomplish their intended goals‚ÄĒfrom writing a check to a non-profit to investing in a for-profit company with a social mission. When thinking about which strategies make the most sense for you,¬†choose the ones that best reflect your appetite for financial risk and the impact you want to have.¬†

Knowing the different ways in which you can ‚Äúinvest your philanthropic dollars‚ÄĚ‚ÄĒthe first step is understanding the tools in the charitable giving toolbox.

                                                                               

Grantmaking: The practice of giving money to support non-profit organizations whether general operating expenses, specific programs or capacity and sustainability needs. Usually there is no expectation of financial return on investment. This counts toward the 5% mandatory annual payout rule for foundations.

Venture Philanthropy: Applies concepts and techniques from venture capital finance and business management to achieving philanthropic goals. Typically assists organizations in the planning, launch and scaling of new programs or social purpose enterprises, funding and business acumen. This strategy focuses on measurable results and high engagement, with donors often taking seats on the boards of the organizations they fund. This counts toward the 5% mandatory annual payout rule for foundations.

Program-Related Investing: Below-market investments to non-profits or commercial ventures for charitable purposes. Unlike grants, PRIs are expected to be repaid. To qualify as a PRI, the IRS requires rates to be below market (often in the 1-3% range) on a risk adjusted basis. PRIs are usually made in the form of deposits, loans or equity investments. Once repaid, PRIs are reused for subsequent grants or additional PRIs. This counts toward the 5% mandatory annual payout rule for foundations.

Impact Investing:¬†¬†The¬†intentional use of investment capital to create positive social and environmental outcomes.¬† The investor has the expectation of a ‚Äútraditional‚ÄĚ financial return but in addition seeks a societal benefit by investing in for-profit social enterprises. There are two different ways to look at this philanthropic opportunity; those who are¬†Financial First Investors seek to optimize financial returns with a floor for social/environmental impact.¬†This group tends to consist of commercial investors who search for investment vehicles that offer market-rate returns while yielding some social/environmental good.¬†Impact First Investors seek to optimize social or environmental returns with a financial floor.¬†This group uses social/environmental good as a primary objective and may accept a range of returns, from return of principal to market rate. They are more willing to view their investment as ‚Äúpatient‚ÄĚ capital in order to help reach certain social/environmental goals, wherein there may be higher risks.

Sustainable Investing (aka Socially-Responsible Investing-SRI): Financial investment decision-making that takes into account a company’s environmental, social and governance (ESG) policies and records. Investors practice SRI by screening their investment portfolios in accordance with their values, investing in socially responsible mutual funds, and engaging in proxy voting and shareholder advocacy.