Impact Investing and Donor Advised Funds
Submitted by American Endowment Foundation on September 18th, 2015by Eric Kinaitis, Editor
Sometimes referred to as ESG (Environmental, Social, Governance) principles, the concept of impact investing denotes the idea of investing to achieve more than a financial return, but to be able to use financial capital to solve broader environmental and social concerns.
What might have once been regarded as a fringe interest has grown in popularity, with one survey estimating that the global impact investment market is sized at $715 billion and still growing.
An analysis from Harvard Business Review attempted to categorize impact investing efforts in the following ways:
Place: Investments made to advance efforts targeted to a specific place or meant to aid a specific group of people. Providing loans to specific indigenous groups in an effort to aid the growth of commercial agriculture serves as an example.
Process: Efforts that focus on specific business practices, either pro or con, to persuade desired outcomes. Not investing in companies that produce items that an investor is against, such as alcohol, tobacco, or weapons are a clear example of being focused on process. The opposite of that concept is investing in companies committed to fair trade practices within their supply chain.
Planet: Investments made to have a quantifiable environmental benefit. Examples include either avoiding harm to select habitats, or the specific reduction of carbon dioxide emissions.
Product: Efforts in products or services whose intent is to provide a positive specific social benefit. Companies that provide additional educational or healthcare benefits to select audiences can fit this description.
As can be seen from these descriptions, one investment might actually touch upon multiple categories. Other terms like PRI , SASB, GRIIS and more may actually make the concept of what is or is not impact investing more confusing.
In its simplest term, what defines an impact investment may be in the eye of the beholder. Regardless of the definition, the simplicity that a donor advised fund provides remains consistent, regardless if the holdings are intended as an impact investment or not.
A donor advised fund (DAF) could be best described as a charitable investment account that provides simple, flexible, and efficient ways to manage charitable giving. The money or assets that go into a donor advised fund becomes an irrevocable transfer to a public charity with the specific intent of funding charitable gifts. This public charity serves as the administrator of the DAF.
Donor advised funds combined with impact investments can provide opportunities for impactful returns while reducing the risk—literal and perceived—for both the advisor and their donor-client.
In addition to the administrative simplicity that a DAF provides, donor-clients also benefit from:
- an immediate income tax deduction
- no capital gains tax an appreciated assets within the fund
- no estate tax on fund assets
- tax-free growth
- not subject to required distributions nor excise taxes unlike a private foundation
At American Endowment Foundation, we look forward to discussing the circumstances of your clients and how we can help make impact investing a reality. Contact us or call at 1-888-660-4508.