Impact Investing: A 21st Century Tool to Attract and Retain Donors

Abstract

Keywords: Impact investing, community foundation, donor-advised funds, mission-related investing, programrelated investing, community development, community leadership, investments, donor engagement, donor attraction and retention, due diligence, social return, preservation of capitalIntroductionA familiar private foundation tool is being used by the Greater Cincinnati Foundation (GCF), a 50-year-old community foundation with nearly $500 million in assets, as a way to engage donor advisors to make a positive difference in the community.Program-related investments, originally a taxcode device specific to private foundations, have for some years been adopted by community foundations as simply low-interest loans - an alternative to grants that ideally returns charitable capital to the foundation to be reinvested.GCF has expanded its thinking about what are now typically called investments. They can go beyond traditional housing and communitydevelopment investments to investments that reduce a community's carbon footprint and create jobs. At the same time, the foundation can now offer donor advisors the opportunity to partner in these investments, recycling their donor-advised fund's charitable capital in a way that provides a social return in the community as well as a small financial return.Defining Impact InvestingThe term impact is a relatively new term that means different things to different people. As the foundation started down this path, an adaptation by Imprint Capital Advisors of F.B. Heron Foundation's Mission-Related Investment Opportunity Continuum was particularly helpful. As shown in Figure 1, the spectrum of philanthropic tools ranges from grants to tools that blend pure philanthropy and financial tools (offering a social return is paramount while providing some small financial return), to tools of the capital markets (providing a market rate return, but little or no social return).The Money for Good initiative from Hope Consulting (2010) defines investing as opportunities that:* allow you to put money towards an opportunity that creates a social or environmental benefit,* attempt to return at least the principal invested,* offer a return on your money (which varies by opportunity), and* are not tax deductible.The definition used by GCF's governing board is leveraging foundation assets to invest in local projects using loans and equity positions in addition to grants. As part of its mission as a community foundation, GCF's impact-investing efforts are geographically focused within the service area of the foundation.Why Impact Investing for a Community Foundation?According to Imprint Capital Advisors, the advantages of investing are:* More efficient use of funds: investments that are repaid can be re-invested into more investments or given out as grants.* Provid[ing] capital for critical community needs: for job creation, working capital to social services providers and arts organizations, and affordable housing loans when banks are retreating.* Catalyz[ing] investment capital for the community: from donors, local financial institutions, national and local foundations. (Khor, 2010)Through an investment, GCF may be able to see a more significant difference in the community sooner - simply due to the size of the investments. (GCF's average investment to date is $580,000.) If a grant was awarded for a community-development organization to purchase and renovate one house at a time, the timeline for a 24-house project might take six years. By using a larger low-interest loan from the foundation, the organization is able to continually acquire and renovate more houses. This orderly process for renovation will yield economies of scale in areas such as hiring contractors. The net effect is that the change in the community should be more obvious and more powerful when it can be accomplished at a broader scale and in a more concentrated time period. …