The Promise of Donor-Advised Funds: Toward an Impact Investing Future
Quick: Name the nation’s fastest-growing charitable vehicle. It’s not the Gates Foundation or the American Red Cross. It’s the network of donor-advised funds that have empowered more than 280,000 individuals to create their own mini foundations and “give like Bill and Melinda Gates” with as little as a $5,000 donation.
These funds have helped to democratize philanthropy and now garner more than $85 billion in charitable assets. They’ve been the No. 1 charitable choice for several years running — and for good reason.
Donor-advised funds are a tax-smart way to give, enabling an individual to make a donation and then contribute to causes over time. They’re also less expensive to open and operate compared to private foundations, and they provide access to tools and information that enable informed and effective giving decisions.
For many, these funds also make giving a family affair. They create a structure around which individuals and families across generations can learn about the power of philanthropy to help organizations address critical social and environmental issues.
With this success, donor-advised funds have come under a spotlight. A high-profile investigation into a toxic work environment at the Silicon Valley Community Foundation led to the resignation of CEO Emmet Carson earlier this year. The SVCF had been the donor-advised fund of choice for many Silicon Valley entrepreneurs and billionaires. Separately, critics argue that rapid growth is an Achilles Heel for donor-advised funds. As more assets accumulate, they say, less money goes into charities that need it right now. As a result, society loses out on the public benefit of charitable giving while donors maintain a tax benefit from their donations.
Setting aside the fact that these funds granted a record $15.75 billion in 2016 and have an average annual payout rate of over 20 percent (private foundations are only required to give 5 percent), we believe it is time for donor-advised funds — and all foundations and endowments, for that matter — to take a closer look at the investment side of their balance sheet and allocate charitable assets in a way that provides immediate benefit to those who need it most.
The $85 billion in donor-advised fund assets represents a pool of patient capital that could be put to work now — invested in breakthrough solutions to some of the world’s biggest global challenges, or allocated side-by-side to support organizations that also benefit from charitable donations. And with more individuals turning to donor-advised funds to facilitate giving, the opportunity to solve problems with a combination of investments and donations will only grow.
Financially, what we are talking about is sensible risk mitigation. If your goal is to lose weight, you shouldn’t eat three slices of chocolate cake. Similarly, a charitable organization’s philanthropic mission becomes far more efficient if it doesn’t need to undo damage done by unaligned investment management. We’re also talking about optimization. If we are trying to win the game, we better put all the players out on the field. And the stakes are measured in the time value of climate change mitigation and poverty alleviation, health breakthroughs and social justice.
Some investment-to-values alignment is already taking place. A Global Impact Investing Network survey revealed that 225 investors — including foundations, funds, and family offices — invested $35.5 billion across more than 11,000 impact investment deals in 2017. That’s a 58 percent increase from 2016 and reflects significant momentum among investors to address global issues such as access to education and health care, gender inequality, poverty, and climate change.
But more needs to be done, and donor-advised funds can lead the way. At ImpactAssets, where we serve as board members and actively make impact investments out of our own donor-advised fund accounts, donors have been able to deploy philanthropic capital directly into impact investments for nearly a decade. We have built partnerships with impact money managers — firms like Microvest, Better Ventures, and Elevar Equity — that enable donors to invest in deep private debt and equity alongside institutional investors with a minimum investment of just $10,000.
ImpactAssets has also sourced, done diligence, and placed more than 300 custom impact investments that were recommended by its donors. Investments in social enterprises such as Prime Coalition and Legworks, as well as organizations like Terracycle, helped propel ideas and solutions forward while enabling donors to channel capital for maximum impact.
RSF Social Finance and Tides Foundation were also early mobilizers of charitable assets for impact. More recently, Fidelity Charitable offered donors index funds that consider social and environmental factors, as well as financial returns. This move by a mainstream donor-advised fund suggests that momentum is growing to optimize these funds for meaningful impact investing opportunities. And we are seeing a growing movement amongst community foundations all across the country to bring impact investing into their practice.
Funds are also finding unique ways to partner with other organizations to leverage resources and scale up impact investing. One example is Benefit Chicago, an impact investment initiative launched in 2016 by the John D. and Catherine T. MacArthur Foundation, the Chicago Community Trust, and Calvert Impact Capital to finance the growth of social enterprises throughout the Chicago region. The collaboration tapped donor-advised funds to raise a targeted $100 million to fund initiatives like Sweet Beginnings, a producer of honey-based products that provides jobs and job training to people with criminal justice histories.
Donor-advised funds are also well positioned to fill funding gaps in the science and engineering space. A June 2017 MIT report highlighted how these funds could help cleantech, biotech, and other technologies cross the innovation valley of death. “Armed with patient capital, philanthropists are uniquely positioned to de-risk emerging innovation-driven ventures,” the paper noted, and they “can have a catalytic impact in achieving charitable missions (and financial returns).”
That catalytic power, multiplied by more than 280,000 donors, could be a formidable funding source as social enterprises and organizations tackle the human needs and system risks that are growing daily. We believe that donor-advised funds, with an efficient structure that appeals to mass affluent investors, can open the door to enable a greater segment of the public to become impact investors. In so doing, these masses may join in lifelong strategic philanthropy with even more optimized alignment of assets and with much higher grant-making percentages than private foundations.
Liesel Pritzker Simmons
Liesel Pritzker Simmons is Co-Founder and Principal of Blue Haven Initiative, where she oversees, as an investment strategist, a portfolio focused on holdings that generate competitive financial returns and address social and environmental challenges.
Ron Cordes, a co-founder and CEO of AssetMark, has enjoyed a 30+ year career in the investment industry. Since co-founding the Cordes Foundation in 2006 with his wife, Marty, Ron has focused on impact investing and social entrepreneurship and currently serves on the boards of MicroVest, ImpactAssets, Fair Trade USA and the Social Impact Lab at Lynn University.