What Is Impact Investing in Philanthropy?
Impact investing is a catch-all term for putting money to work in ways that both make a positive social or environmental impact and generate a financial return for the investor. It’s distinct from traditional investing, which is focused only on the financial return. Impact investing reflects a growing trend in philanthropy, as more foundations choose to invest their assets in ways that advance their missions.
- Investing to make a positive social or environmental impact and generate a return.
- Mission-related investing.
- A way for philanthropists to put more resources in the service of their mission.
What happens to money not paid out by foundations?
Private foundations are created to use a significant amount of money for philanthropy. The founders make a tax-deductible contribution to establish the foundation’s endowment (the pile of money), and then every year, the foundation is required to pay out at least 5% of the value of those assets in the form of grants and operating expenses. Some pay out more, but there is still a lot of money sitting in foundation endowments: U.S. foundations collectively pay out about $100 billion a year, while sitting on more than $1.6 trillion in assets.
So what happens to all the foundation money that is not paid out in a given year? It’s invested. That can mean anything from parking it in accounts at big banks to building elaborate investment portfolios.
How can a foundation have a financial impact beyond grantmaking?
Grantmaking is far from the only way a foundation can have a financial impact. Given the numbers — that $1.6 trillion+ sitting in foundation endowments — impact investing represents a huge untapped potential. Options for donor-advised fund holders to participate in impact investing represent another $250 billion+ in assets. Individual mega-donors who give through LLCs often engage in for-profit impact investing. Community foundations invest their assets, too. If most or all of these assets were deployed in impact investments, they could have an enormous positive social and environmental impact in line with funders’ philanthropic missions.
What is impact investing as a philanthropic strategy?
With impact investing, instead of focusing entirely on what will provide the greatest return, an investor aims to generate returns while also making a positive social or environmental impact. This can mean all kinds of things, including investing in renewable energy, pulling investments out of companies that sell fossil fuels or make weapons, or investing in the development of affordable housing.
As with conventional investments, the investor has a choice about the level of risk and the types of investments they want to take on. While impact investing does generate returns — that’s what makes it investing instead of philanthropic giving — overall, the financial returns tend to be somewhat lower than those of conventional investing.
Some foundations dedicate a portion of their investing to impact investing, and make more conventional investments with the remainder. A few funders, believing that all of their activities should advance their mission, put their entire endowment into impact investments.
What is the role of impact investing in philanthropy?
The term “impact investing” was coined by the Rockefeller Foundation in 2007. That said, some foundations have been investing with an eye to positive social and environmental impact since well before that. The Jessie Smith Noyes Foundation, for example, states on its website, “We began aligning our endowment investments with our mission starting in the 1980s, decades before ‘impact investing’ … became a buzzword in philanthropy.” The MacArthur Foundation’s website indicates that the legacy foundation has been making impact investments since 1983. Indeed, the Rockefeller family’s own involvement in the creation of social housing in New York a century ago could be understood as a form of impact investing.
Today, impact investing is gaining momentum as a philanthropic trend, but still only a small share of foundations’ assets are invested for positive social impact. While a handful of philanthropic organizations, such as the California Endowment and the Skoll Foundation, have put most or all of their assets in impact investments, they are not the norm. The median foundation in a 2024 Bridgespan Social Impact survey had allocated just 5% of its investable assets to impact investments, IP’s Michael Kavate reported.
Types of Impact Investments in Philanthropy
Mission-related investments (MRIs)
Distinct from seeking social or environmental benefits in a broad sense, mission-related investments focus investments in line with the foundation’s specific mission. A foundation whose mission is to address the racial wealth gap might put its investments at Black-owned banks. A climate funder might invest in renewable energy companies. MRIs are usually market-rate investments with a positive social impact.
Program-related investments (PRIs)
Program-related investments are made first and foremost to advance one of the foundation’s purposes. Production of income is “not a significant purpose” of PRIs, according to the IRS. Thus, program-related investments may be below-market-rate investments.
Community investments
Funders concerned with affordable housing, economic equality and community development might make community impact investments, such as participating in community loan funds in underserved communities.
Divestment
Some foundations choose to divest from — meaning proactively not invest in — certain industries or areas that are at odds with their missions. For instance, the Rockefeller Foundation, which was founded by an oil tycoon, has pledged to divest from fossil fuels. The California Endowment has divested from fossil fuels, tobacco and other industries that have a negative impact on community health, and also from private prisons.
An Impactful Philanthropic Strategy
Impact investing is an important philanthropic tool given that the vast majority of foundation assets are invested. If all foundations invested their endowments in line with their philanthropic missions, the impact would be enormous. Organizations like Rockefeller Philanthropy Advisors and the Global Impact Investing Network are working to make it easier for philanthropic organizations to shift investment priorities and scale up their impact.
