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A Donor-Advised Fund Expands With 'Impact' Investment Options

A new breed of donor-advised fund is bringing more meaningful options to the donor and investor, in addition to the structure’s traditional benefits.

Six years ago, the Calvert Foundation launched an independent nonprofit, ImpactAssets, tasked with managing what was then a donor-advised fund still in prototype and run by Calvert. The goal was to more fully integrate socially responsible investing (SRI) into a conventional charitable giving model.

With traditional donor-advised funds, givers make a donation and receive an immediate tax benefit, while the fund then invests their money (with the hope of broadening its size) before making a subsequent series of grants to designated charities. ImpactAssets’ Giving Fund lets investors choose how their money is invested in that in-between step from a menu of areas they are likely to find more meaningful. The investment options take into account environmental, social or corporate governance factors. ImpactAssets scans for things like global health impact, microfinance or the use of sustainable resources. Grantors to the fund can make these investments across most major asset class types—going beyond the confines of the smattering of ESG stock and bond funds of five years ago. Like other donor-advised funds, investors still grant out the money to charities or foundations of their choosing over time. 

“The whole field is evolving,” said Tim Freundlich, president of ImpactAssets. “Five years ago there was a lot less going on, and there were not a lot of good track records to look at outside the ESG [environmental, social and governance] stock and bond managers." ImpactAssets "is kind of like a weird, diverse 401(k) platform. You have all these different-style boxes and you get to pick and choose—either with your financial advisor’s advice, or decide yourself.”

From 2011 to 2015, the fund grew four-fold, from $64 million to $269 million, and increased its holdings in impact assets 25 percent to over $88 million, thanks to increasing interest.

A recent report from US SIF showed that assets in products marketed as SRI have increased 33 percent since 2014, to $8.72 trillion, while the amount of assets being screened for ESG criteria—but not necessarily labeled as an “ESG product”—jumped 69 percent to $8.1 trillion in the same time frame. “More and more investment managers and financial advisors [are] bringing this theme to an existing investment process, because clients demand it or because they can better manage risk or because they think they can get better returns,” said Chris McKnett, head of ESG for State Street Global Advisors.

McKnett, who gave a TED talk on ESG a few years ago, describes the evolution of socially conscious investing in a three-part series.

The first generation, SRI, focused on the absence of negative social impact, or avoiding companies with bad practices, while a second generation of ESG involved investing in companies with some values-based social objective in mind. Now in a third generation, ESG criteria are being examined along with traditional financial metrics to generate profit as well as help society in some objectively-based way.

Though the interest and growth in this type of investing is certainly there, Freundlich says one of the issues his nonprofit faces is that many advisors haven't been comfortable enough with ESG to recommend the approach to clients.

“When we go side-by-side with a more conventional donor-advised fund, when that’s the case, we win the client,” he added.

One of ImpactAssets’ clients is Seth Goldman, the co-founder of Honest Tea, who after selling his organic tea company to Coca-Cola in 2011, donated $1.5 million of appreciated stock to the Giving Fund.

“A lot of people struggle in the paradigm of for-profit or nonprofit,” said Goldman, adding that investors often wonder where their money will have the most impact and must also consider the tax implications of such a decision.

With ImpactAssets, money can go to “the best place, the best impact,” said Goldman, and donors need not worry about complicated tax issues: the principal donation to the fund is a deduction.

Moreover, the returns from an investment can be rolled into another opportunity down the road, which is an added bonus for the “TeaEO Emeritus.”

“I don’t technically own the money [in the fund] anymore, but we’re still able to invest in change and change makers,” Goldman said.

To help grow a larger, more informed community of interested financial professionals, ImpactAssets has been expanding its publications division as well as IA50, which is the first publicly available database for private debt and equity impact investment fund managers.

With the largest transfer of wealth ever set to go to millennials, who, along with women, are more interested in SRI and impact investing than traditional male investors, according to Tiburon Strategic Advisors, there’s significant reason to believe socially conscious investing—however the industry will label it in the future—will only continue to grow.

“As those investors increase their share of wallet, we’ll see continued flows,” said McKnett.

“It will be harder and harder to distinguish between ESG investing and just investing,” he added. “In my mind, that’s not a bad thing.”

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