Family foundations have long been staples of affluent investors for both estate planning and charitable giving purposes. While foundations historically focused on grant-making as their primary means of achieving their mission, increasingly, those foundations have decided that they can have two methods of making a positive impact on society. The foundation still makes grants to worthy organizations, while portfolio investments are now seen as agents of impact, too, chosen for their ability to have a positive influence on causes that are aligned with the organization’s mission.
Together, these two aspects multiply the organization’s ability to meet its mission with the same dollars under its care.
This new operating model continues to evolve as impact investing grows in investor acceptance. One important development for charitably minded investors is the rise of the Donor Advised Fund, or DAF. Generically speaking, Donor Advised Funds can be seen as “standardized” versions of foundations, allowing the investor to donate a lump sum, gain the tax deduction, and engage the DAF manager to handle both investment and administration. They well work for smaller sums of money where the cost of administration of a private foundation would be prohibitive. (The donor still controls where gifts are directed.)
From an impact investment standpoint, the DAF model opens some interesting avenues for the investor. Typically, a DAF account would have a marketable securities component managed according to a standard model. For an impact investor, sustainable mutual funds are usually at the core. These investments are chosen for their alignment with the entity’s mission. A suite of more impactful options come from the DAF’s access to private investments. Such investments have an element that publicly traded securities do not have: “Additionality”.
While alignment is an inward focused concept, additionality is inherently externally oriented. Since marketable securities are typically traded among investors, and nothing new is created, the choice of one security versus another is more about alignment with one’s values or mission. Additionality, however, refers to the degree to which an investment is “adding something additional”, or new, to the mix. Investing in venture capital, for instance, brings new capital to create a new business whose products or services would not have existed without that capital. Investing in a solar farm unequivocally adds clean energy to the grid, improving the overall emissions profile versus the status quo. As such, private investments bring a new dimension to the impact picture.
A DAF, by its very structure, allows investors to access vehicles that they may not have been able to otherwise. Private investments are often restricted to investors who meet certain wealth criteria, and minimum investment requirements for a particular opportunity may make that investment out of reach. But since the assets in the DAF have been “donated”, they are no longer bound by the donor’s wealth characteristics. And the DAF may have economies of scale to pool investors and meet minimums. This opens doors for impact that may have been otherwise closed to the investor.
Viewed in totality, one can see how a DAF could help an investor with both their charitable giving and social impact objectives.