On November 26 we hosted a webinar recapping the key themes of our recent report Mobilizing Donor Advised Funds for Impact Investing. Cornerstone’s Head of Impact Strategy, Katherine Pease, and Chief Investment Officer, Phil Kirshman, talked about the variety of ways in which the capital held in donor advised funds can be invested to further one’s impact goals, thereby magnifying the impact of a DAF’s grantmaking activity. Along with this video replay, the slides from this presentation can be downloaded here. A summary version of our full report is also available here.
More than $23 billion was contributed to donor advised funds (DAFs) in the United States in 2016, yet only a minor fraction of donor advised fund assets are invested for positive social and environmental impact. More often than not, DAF assets are managed by a donor advised fund provider — such as a national investment bank that has developed a separate nonprofit to serve as a holding tank for DAF assets, or a community foundation — that has little or no offering for donor advised fund holders who want to leverage their DAF investment capital for positive impact.
Due to evolving demands from donor advisors, however, this is starting to change.
In this report we outline the structure of DAFs and a variety of innovative ways that donor advised funds are being deployed strategically to help donors achieve their financial and impact goals through impact investing while also providing necessary investment capital for social and environmental initiatives. Cornerstone Capital Group sees this trend as an opportunity for additional capital in the market to be moved toward sustainable and impact investments.
By using DAF funds for impact investments, donor advisors can support the issues they care about then redeploy the returns from those investments to new mission-aligned initiatives in need of capital. This capacity is particularly valuable for supporting social enterprises that need early-stage capital because they do not yet qualify for established venture funds. Moreover, because the donor advisors are not relying on the returns from the investments to fuel their personal capital needs, they may be more comfortable making investments that are higher-risk and provide lower returns than they would otherwise.
We identify eight ways to deploy DAF capital to work to achieve financial goals alongside impact aspirations. We offer specific examples and insights from ImpactAssets, Impact Charitable, RSF Social Finance, The Denver Foundation, Tides Foundation, and Triskeles Foundation, among others.†
Roughly $80 billion is currently held in donor-advised funds in the US. We believe those funds should be aligned with the donor’s values and targeted impacts until they are ultimately given to their favorite charities. Unlocking the donor-advised funds held by families in Colorado for impact investing will create a pool of capital that can address the most pressing needs in our communities while generating a reasonable rate of return.
At Impact Charitable, we operate according to a strongly held belief that the investment strategy for foundations and donor-advised funds should not solely target a rate of return or future value, but should be aligned with the philanthropic goals of the donors. Dollars set aside for charity today should not wait until they are granted away before they create the impact donors want to have. For that reason, our donor-advised funds are 100% invested in impact.
Impact Charitable takes a broad portfolio view in how we invest our funds. Within a diverse portfolio, we can accept lower rates of return, take risks to create greater impact, and make longer-term investments that the market might not typically accept. Alongside impact-oriented investments in the public markets and cash accounts, up to 25% of Impact Charitable’s funds are committed to funding highly impactful projects and organizations in Colorado. While maintaining the liquidity needed to fund our donors’ grant-making, investment dollars will create impacts aligned with the values and goals of our donors.
What is a Donor-Advised Fund (DAF)?
A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.
Local Investment Solutions
Donor-advised fund or foundation assets are not needed to cover expected future retirement, educational or other expenses. They do not have a cost of capital or required rate of return limiting how they can be invested. Impact Charitable uses this flexibility to develop investment approaches focused on the needs of Colorado communities.
We cannot rely solely on the traditional investment market to make the kinds of investments that our communities need. The affordable housing crisis facing our state is a prime example of this. The Denver metro area is facing a shortage of tens of thousands of affordable housing units. Nevertheless, the market is not investing in the development or preservation of such housing. Investor money continues to fuel construction of luxury apartments while often displacing families from existing affordable homes.
Outside of heavy government subsidies, investor returns are unfortunately inherently tied to the rental rates of housing, which makes targeting market rates of return in affordable housing exceptionally difficult. Impact Charitable is supporting several efforts to create vehicles for investing in affordable housing with reasonable (though perhaps not “market”) rates of return.
For-profit early stage social enterprises often struggle to raise capital. They may have business models that hinder future exit opportunities or have expected profit margins and scalability that are not as attractive as other investment opportunities. A social enterprise may put the impact they create at risk if they accept an exit opportunity based solely on shareholder value. Social enterprises are often entering a market or working with technology that is less proven than other companies. Impact Charitable is pursuing two ways to address these hurdles that social enterprises may face.
For early stage companies that are not seen as investable yet, we can provide fiscal sponsorships to fund portions of the business that align with our charitable purposes. For example, Future Pointe is utilizing emerging anaerobic digester and biomass energy technologies to address food waste in Colorado. They have reached several milestones since their launch, but have struggled to attract angel investors thus far. This non-dilutive capital can help carry companies through the riskiest stages of their growth, not consume cash flow, and help prepare them for funding from impact investors.
For companies where a large exit is either not desired by the management team or questionable to investors, Impact Charitable plans to utilize structured exit investments. Structured exit investments provide payment holidays until a company begins to scale up, and ties investor payouts to revenues. Investors receive payments from the company until they recoup their investment plus a negotiated return. Companies such as Knotty Tie Co., which employs resettled refugees with above-average wages and benefits, may thus be able to ensure their mission remains intact as the company grows.
Impact Charitable also supports new and innovative investment tools. We recently provided a recoverable grant to support a prototype social impact bond with a local municipality. Our funds are supporting early childhood education programs for children who would otherwise not have access to early childhood educational opportunities. The municipality will monitor the educational expenses that are saved in later years attributable to the children’s participation in these programs. Based on these savings, Impact Charitable’s funds may be returned.
Impact Charitable structures our local investments to best meet the financial needs of a business or project, give them their best opportunity to succeed, and create the impact needed in our communities. We believe that donor-advised funds provide a unique opportunity to activate capital that can make investments focused on maximizing impact rather than maximizing financial returns.
Impact Charitable’s mission is to activate charitable dollars for impact through investment, education and strategic philanthropy.
Ed Briscoe is the President of Impact Charitable. He is also the Founder and Managing Partner of Weave Social Finance, a provider of consulting and investment banking services to social enterprises and businesses based in low-income communities.
Erika Karp, founder and CEO of Cornerstone Capital Group, was recently interviewed by Charities Aid Foundation (CAF) America to explore the intersection between market-based solutions and philanthropies, particularly as it relates to investment. We used the request by CAF America to conduct interviews internally with Cornerstone Capital staff and externally with thought leaders in the finance and foundation fields to gather opinions about the nexus of market-based solutions (i.e., traditional for-profit investment via the capital markets) and philanthropy. Topics included the following:
- Areas of collaboration between philanthropy and capital markets,
- Role of Donor Advised Funds (DAFs), and
- Evolution of corporate philanthropy.
For Philanthropies: Aligning Program with Endowment
Interviewees cited collaboration between traditional investors and philanthropies as a key to solving the world’s most pressing issues. Philanthropies bring specific expertise and willingness experiment, while market-based solutions bring scalability and financial sustainability.
Our interviews identified three areas of collaboration:
- Partnerships between philanthropies and investors can bring scalability to projects. Market-based solutions provide financial returns that can be recycled for further impact while philanthropies typically have deep knowledge of specific social and environmental issues.
- Philanthropies can amplify the impact of their capital by allocating investment of their endowments to sustainable investments.
- Collaboration between philanthropies and investors can increase the attractiveness of certain investments, as philanthropies that focus on social impact can act as a guarantor for part of the investment and entice more capital to projects.
Download the full report here.
To discuss customized advice on this or other investment themes, please contact us at email@example.com.
Emma Currier is a Research Associate at Cornerstone Capital Group. Emma graduated with a Bachelors of Arts degree in Economics from Brown University in May 2016. While at school, she worked with the Socially Responsible Investing Fund and as a teaching assistant for the Public Health and Economics departments. She spent her sophomore summer researching differences between American and Indian educational styles in Arunachal Pradesh, India, and completed a summer investment bank analyst position with Citi in the Media & Telecom group in 2015.
Sebastian Vanderzeil is a Global Thematic Research Analyst with Cornerstone Capital Group. He holds an MBA from New York University’s Stern School of Business. Previously, Sebastian was an economic consultant with global technical services group AECOM, where he advised on the development and finance of major infrastructure across Asia and Australia. Sebastian also worked with the Queensland State Government on water and climate issues prior to establishing Australia’s first government-owned carbon broker, Ecofund Queensland.