Managing Charitable Dollars

4.  Impact Investing – Activity Suggestions

When it comes to impact investing, there are a number of activities organizations can engage in, each of which represents progress in making an important difference to your cause! Ranging from fairly simple to moderately complex – and some of them involving little to no cost – these steps are not mutually exclusive, and many nonprofits use several of them in tandem and in creative ways to achieve their objectives and deploy their resources effectively.

Increase Annual Spending Percentage

Nonprofits considering impact vs. the need to preserve funds in perpetuity may increase the annual spending percentage of assets to 6% or 7% (from 5% or less) to align their spending with their goals for impact.

Support Local Financial Institutions to Support the Community

Organizations that want to make an impact in an underserved or distressed community may consider moving funds that are currently held by their investment advisor in an investment money market fund to a Community Development Financial Institution (CDFI) or a local bank. CDFI investments leverage partner funding with other sources of capital to strengthen communities while providing a return on the organization’s investment.

Make Socially Responsible Investments

Organizations that want to make sure their money is working for (and not against) their mission and values may engage an investment advisor to obtain environmental, social, and governance metrics and to do research on socially responsible investments that can be added to (or removed from) their investment portfolios. See Topic #3 for more information on SRI and ESG. A “Know What You Own” report by Andorra is a great starting point. Keep in mind that SRI funds may simply be a screen – verify with your investment advisors the specifics of what you are investing in to avoid surprises!

Make Recoverable Grants

Organizations that have grantees that are likely to be in a position to repay funding may make recoverable grants instead of grants or loans. Like loans, recoverable grants allow the nonprofit to invest in the grantee’s project with the possibility that the funds will be repaid and available for future re-investment in new projects. Unlike loans, recoverable grants may be easier to deploy as they generally require only a modified grant agreement, not more specialized documentation.

Guarantee Loans

Organizations may guarantee a grantee’s loan from a third-party lender, which may make a significant difference in the success of the grantee’s loan application or in the amount of credit extended, meaning loan guarantees can provide stability for a grantee organization and allow for more impactful work. See our Sample Loan Guarantee Policy.

Make Loans

Organizations may make loans to other organizations for charitable purposes. The primary benefit of a loan is the opportunity to advance the organization’s work while allowing for future reinvestment in other organizations and projects when the funds are repaid. Depending on how the loan is structured – including the type of organization borrowing the funds and the interest rate charged – the loan may qualify as either a PRI or MRI, which may be important if the lending organization is a private foundation. See our Sample Loan Agreement.

If you are worried about getting started or about the time and expense involved in making a loan, consider making a loan to an existing grantee. Your grantees can make great partners – you are already mission-aligned and there will be significantly less due diligence to undertake in connection with the organization, its leaders, its governance structures, and its capacity to fulfill the loan requirements. Alternatively, consider partnering up to make the loan (or another investment) with a peer nonprofit – that way, you can share or leverage due diligence responsibilities.

Make Equity Investments

Sometimes an investment in a business itself is what’s needed to make impact that aligns with an organization’s mission – and sometimes the easiest way to get started is with others. Organizations may make direct equity investments in charitable causes aligned with their mission in partnership with other nonprofits or through a venture capital fund or other pooled investment structure. Because equity investments can be complex and because they may trigger private foundation rules relating to jeopardizing investments, unrelated business income, and excess business holdings, organizations exploring these opportunities should consult with their legal and investment advisors throughout the process.

Advocate for Impact Investing

Nonprofits can raise awareness of impact investing and promote its adoption by other organizations by sharing information about their activities in their profiles with GuideStar/Candid and Charity Navigator, on their own website, and on their IRS Forms 990/990-PF. See the Untours Foundation’s resources Paradigm Shifters and 990 & 990-PF Toolkit for more ideas.  

Consider Spending Down for Maximum Impact

Some organizations may conclude the best time to act to further their mission is now and their Boards may make plans to spend down the assets rather than continue operations in perpetuity. This is a decision that is not taken lightly and organizations considering spending down must review what the governing documents and donor restrictions allow; and consult with their legal, financial, and programmatic advisors to ensure compliance.

No matter which activity or group of activities an organization chooses, all of the above suggestions can drive impact. And now that you have some ideas for investment strategies – both traditional and impact-oriented – and examples of activities you can undertake, the Board can adopt the investment strategy and activities that are right for your organization.

For a discussion of the legal requirements governing charitable investing and spending go to Topic #5 or skip to Topic #6 if you are looking for resources to develop (or update) your organization’s investment policy statement.