Impact Investing And Donor-Advised Funds: Guidance For The Savvy Donor

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Impact investing, broadly defined as investing for the purpose of generating a social or environmental as well as a financial return, continues to grow in popularity. Some refer to impact investing as using environmental, social and governance (ESG) factors in making investment decisions. Donor-advised funds (DAFs) are a useful tool for impact investing, provided that donors and their advisors are aware of certain points before making these investments.

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Are there any limitations on to whom a DAF may make an impact investment?

A DAF administrator (the charity that sponsors the fund) wants to avoid making any distribution that could be taxable. Usually a distribution from a DAF is in the form of a grant to a charitable organization to fulfill its charitable purpose. Although it is unlikely that an impact investment made out of a DAF will qualify as a distribution, that term is not specifically defined in the Internal Revenue Code, and guidance from the IRS is still forthcoming.

Certain rules apply to all DAFs, regardless of intent. For example, a DAF cannot make a distribution to an individual. Therefore, a distribution to a sole proprietor, regardless of the ESG merit of the activity, cannot be made from a DAF. In addition, a distribution to a non-charity would require a process known as expenditure responsibility that some DAF sponsors may be ill-equipped to conduct. A distribution out of a DAF to a charitable intermediary, such as a nonprofit loan fund, is one route available for impact investors to explore.

Does the investment need to be “prudent?”

A DAF impact investment is likely subject to the same state prudent-investor requirements as any other charity investment. Almost all states have adopted some version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which includes a fiduciary standard for the management and investment of funds. While an exception exists for “program-related assets,” not all impact investments will qualify.

However, donor intent often can override statutory prudent investment requirements. A DAF donor could considering authorizing certain types of investments at the time of his or her gift, which may provide the DAF sponsor with more comfort and flexibility in making impact investments that are higher-risk. The sponsoring organization also can adopt an investment policy that includes impact investments, so any decisions regarding an individual DAF will be consistent with its policy.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Impact investing, broadly defined as investing for the purpose of generating a social or environmental as well as a financial return, continues to grow in popularity. Some refer to impact investing as using environmental, social and governance (ESG) factors in making investment decisions. Donor-advised funds (DAFs) are a useful tool for impact investing, provided that donors and their advisors are aware of certain points before making these investments.

Are there any limitations on to whom a DAF may make an impact investment?

A DAF administrator (the charity that sponsors the fund) wants to avoid making any distribution that could be taxable. Usually a distribution from a DAF is in the form of a grant to a charitable organization to fulfill its charitable purpose. Although it is unlikely that an impact investment made out of a DAF will qualify as a distribution, that term is not specifically defined in the Internal Revenue Code, and guidance from the IRS is still forthcoming.

Certain rules apply to all DAFs, regardless of intent. For example, a DAF cannot make a distribution to an individual. Therefore, a distribution to a sole proprietor, regardless of the ESG merit of the activity, cannot be made from a DAF. In addition, a distribution to a non-charity would require a process known as expenditure responsibility that some DAF sponsors may be ill-equipped to conduct. A distribution out of a DAF to a charitable intermediary, such as a nonprofit loan fund, is one route available for impact investors to explore.

Does the investment need to be “prudent?”

A DAF impact investment is likely subject to the same state prudent-investor requirements as any other charity investment. Almost all states have adopted some version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which includes a fiduciary standard for the management and investment of funds. While an exception exists for “program-related assets,” not all impact investments will qualify.

However, donor intent often can override statutory prudent investment requirements. A DAF donor could considering authorizing certain types of investments at the time of his or her gift, which may provide the DAF sponsor with more comfort and flexibility in making impact investments that are higher-risk. The sponsoring organization also can adopt an investment policy that includes impact investments, so any decisions regarding an individual DAF will be consistent with its policy.

By David A. Levitt, read the full article here.