The last few years have seen innovation, new tools and more resources than ever devoted to making a difference in our communities and beyond. Here are some of the most important and exciting trends.
The Rise of Impact Investing
Philanthropically committed funds are traditionally divided into two silos: grants for social impact and investments for financial growth.
Grants to nonprofits are designed to maximize social impact by providing critical support to worthy causes. They can be viewed as a “social investment” with a 100 percent negative financial return for the donor. Once given, the funds never come back.
Invested funds are another story. The bulk of philanthropically committed capital is invested in publicly traded securities or private markets for maximum returns.
However, like grants, those investments may affect a variety of social issues, such as the environment, immigration, labor practices, food, education, resource consumption, gender pay disparity, health care or fighting human trafficking or discrimination. Sometimes, foundation or donor-advised fund (DAF) investments actually counteract the very mission for which the funds were donated.
Recently, philanthropic and investment leaders have come to recognize that grants and investments can have both financial returns and social impact—and that strategic alignment and integration with mission is important to maximize change.
Growth of PRIs
In the Tax Reform Act of 1969, the Internal Revenue Code permitted a giving vehicle for foundations, called “program-related investments” (PRIs). A PRI is a method of making capital available to both nonprofits and for-profits that are addressing social or environmental concerns.
The Internal Revenue Service recently issued new regulations that encourage foundations to enhance the impact of their philanthropically committed capital by using PRIs when investing at least some of the significant funds that sit in endowments. These regulations give nine new examples of different types of PRIs.
With a PRI, a foundation lends to or invests its endowment assets in a nonprofit or for-profit entity in a way that furthers its mission. At the same time, the investment has the potential of providing a positive financial return to the foundation.
To qualify as a PRI, three key criteria must be met:
- The investment’s primary purpose must be to advance the foundation’s charitable objectives;
- Neither the production of income nor appreciation of property can be a significant purpose of the investment; and
- The funds can’t be used directly or indirectly to lobby for political purposes.
Examples of PRIs include:
- Making a low interest rate loan to a nonprofit to pay off a building mortgage—saving the nonprofit significant interest over the life of the loan; and
- Making an investment in a for-profit company researching and developing an “orphan drug” to help cure a disease that primarily affects people in developing countries.
PRIs help foundations solve social and environmental problems by allowing them to use market-based tools to grow and recycle at least a portion of their sizable philanthropic assets for future use.
Women Taking the Lead
Women have changed the face of philanthropy. With more money and increased control and influence over how it’s spent, more women than ever are making philanthropic investments to help address and solve the problems of our time.
Consider these facts:
- In the United States, women run more than 10 million businesses with combined annual sales of $1.1 trillion and make 80 percent of consumer buying decisions.
- Twenty-six percent of working wives in the United States make more than their working husbands.
- Female-headed households in this nation are more likely to give to charity than male-headed households, and at nearly every income level, women donate almost twice as much to charity as men.
- Women will inherit 70 percent of the $41 trillion in intergenerational wealth transfer expected over the next 40 years in the United States.
- Women now control more than half of the private wealth in the United States.
- Yet, out of every dollar granted by U.S. foundations, less than 8 cents funds programs for women and girls.
Women are leading philanthropy on two fronts: by developing programs that help them become better, more strategic philanthropists and by joining charitable ventures dedicated to addressing issues facing women and girls.
“Women are more comfortable working in community, making decisions together, pooling resources and leveraging their collective impact than men,” says Donna Hall, president of the Women Donors Network, a national network of women philanthropists.
Judith Rodin, Ph.D., president of the Rockefeller Foundation, stated that to change the world, “the single most important thing we can do is unleash the full power of half the people on the planet—women.” Women are flexing their individual and collective muscles, searching for deeper, sustainable solutions to pressing problems, giving more thoughtfully and strategically and achieving greater outcomes with philanthropy than ever before.
Innovative Structures Debut
In 2015, Mark Zuckerberg and Dr. Priscilla Chan made headlines when they pledged to give 99 percent of their Facebook shares—currently worth about $45 billion—to charitable purposes. However, no charitable donation was made. Instead, the couple pledged to transfer ownership of the shares to a new limited liability company (LLC): the Chan Zuckerberg Initiative. This LLC will sell the shares and donate the proceeds to charity, invest in other for-profit entities, contribute to political efforts and deploy funds in other ways to “advance human potential and promote equality.” The organization intends to focus on improving education, curing disease and strengthening communities. Its first investment, in June 2016, was in a startup company that trains African engineers for jobs in the tech industry.
“By using an LLC instead of a traditional foundation,” said Zuckerberg, “we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively.” Sophisticated philanthropists are looking for similarly innovative ways to deploy capital to achieve their charitable goals.
A Separate Discipline
Affluent individuals and families recognize the need to plan for their future security and their legacies—and often go to great lengths to do so. Usually, they work closely with experts who make up three legs of the planning table and help them achieve sophisticated tax, financial and estate planning goals.
The same intellectual resources and rigor that were used to earn money in the first place should be applied to philanthropic efforts to distribute that money. To generate wealth, the successful entrepreneur, executive or investor relies on tools like research, analysis, expertise, strategy, organized implementation, careful evaluation and constant adjustment. By using these same tools, philanthropists will achieve greater social returns and impact. In addition, they’ll be far more satisfied with the results for themselves and their families.
Increasingly, experienced philanthropic consultants are acting as a sturdy fourth leg to the financial planning table, working alongside the other three categories of trusted advisors.
Philanthropists should carefully examine the reasons behind their decision to share assets with the less fortunate or with deserving causes. With professional guidance or on their own, they need to address the following questions:
- What do I hope to achieve—for myself, my family, my business, my community and beyond—by being philanthropic?
- Which tools, techniques and strategies are most likely to help me achieve my goals?
- How do I successfully engage the rising generations in the family to help achieve shared goals, now and going forward?
- How do I evaluate my philanthropic efforts to know if they’re succeeding?
- How do I closely align the investment of philanthropic assets with family or organizational mission and values?
Without careful planning, charitable donations can be ineffectual. Most successful individuals pay close attention and devote considerable time planning their investments in the stock market or their businesses. Successful and fulfilled donors will pay equally close attention to their philanthropic plans.
This is an adapted version of the author's original article in the October issue of Trusts & Estates.