Is Impact Investing the Next Big Thing for Donor-Advised Funds?

BY NICHOLAS SALTER, PROGRESSIVE PHILANTHROPY GROUP

With more individuals turning to donor advised funds (DAFs) to facilitate their giving, how can those funds also be invested today to improve communities? As a philanthropy strategist, I’m excited for a better functioning DAF market where donors, nonprofits, and communities in need are all better served. I spoke with several national experts to get their thoughts on connecting DAFs and impact investing.

Real Resources To Mobilize

Today, an estimated $85 billion is sitting in DAFs. That’s $85 billion earmarked for charitable purposes, but waiting to be dispersed to nonprofits. DAFs function like an individual donor’s personal philanthropy account. Donors put assets into these accounts, take an upfront charitable tax deduction, and then, over time, recommend to their account sponsor how the funds are to be granted to nonprofit organizations.

Amit Bouri, CEO at the Global Impact Investing Network, told me, DAFs “represent a largely untapped opportunity for impact investments, particularly as people investing in DAFs have already set this money aside to have a positive impact on the world.” Connecting DAFs with impact investing could also unlock diverse types of capital that are needed as the impact investing market grows. “DAF capital is uniquely flexible. The risk/reward frame may change for donors after putting assets into a DAF, and that may make impact investing more appealing,” said Fran Seegull, Executive Director of the Impact Investing Alliance.

Increasing Demand and Challenges to Overcome

No doubt, there is growing interest from donors and investors to better align their resources, including philanthropic resources, with their values. “We see this trend accelerating, driven by next-gen donors and the rising interest in place-based investing,” Seegull told me. Indeed, many DAF sponsors, including community foundations, already offer their donors limited impact investing options.

Despite the huge potential to better engage DAFs with deeper impact investment, real challenges remain. “There are operational, infrastructure and investor education challenges. But the will to participate in impact investments is there,” Tracy Palandjian, CEO and co-founder of Social Finance told me.

Donor and financial advisor awareness and education is still needed. Amy Bennett, at ImpactAssets, noted that DAFs are “still primarily viewed as a granting vehicle. We need to shift that perception and build awareness and understanding of how to optimize a donor-advised fund for meaningful impact investing opportunities.”

Unlocking Deeper-Impact Investments

Last year, Social Finance, a national nonprofit that mobilizes capital for social impact, closed a $12 million Pay for Success transaction in Massachusetts focused on workforce development. Forty investors participated, including 16 individual investors who utilized their DAFs to support the deal.

Because of this investment capital, Jewish Vocational Services will provide educational and workforce development services to 2,000 adults in the Boston. In this model, investors provide upfront capital to scale a proven program and receive success payments by the Commonwealth if specific, measurable outcomes are achieved.

“Unlocking DAF capital hinged on two primary factors—visionary donors who were excited about deploying their DAF in an innovative manner, and fast-moving DAF sponsors who were willing to partner on a specific impact investing opportunity,” according to Tracey Hsu at Social Finance. Recoverable grants may be a potential pathway to democratize this approach for more DAF donors. According to Gelfand, a recoverable grant allows donors “to dip their toes into providing a different type of financial support to nonprofits they work with.”

In another example, Calvert Impact Capital, the Chicago Community Trust (CCT) and the MacArthur Foundation launched Benefit Chicago—a $100 million impact investment initiative focused on Chicago. The MacArthur Foundation invested $50 million, and CCT committed $15 million from its regular investment pool. Any DAF donor invested in the pool automatically also became an investor in Benefit Chicago. In less than two years, the collaborative raised another $30 million more in investments, mainly from DAFs.

CCT directly engaged some of its largest donors, educating them about the opportunity to grow their philanthropic capital while having an immediate, positive impact in the local community. Benefit Chicago has already made $12 million in loans to social enterprises and intermediaries in Chicago and will deploy another $6 million in the coming months.

Beth Bafford at Calvert Impact Capital, told me, “In general, we have seen community foundations becoming more active in impact investing. For them, it’s a differentiator. They can offer grants and investments that stay local and expand their community impact. It is an attractive value proposition, especially to next-gen donors.”

Nicholas Salter is the founder of Progressive Philanthropy Group where he advises individuals and families on social change philanthropy and impact investing.

The full version of this article first appeared in Inside Philanthropy in April 2018.