As a philanthropy advisory firm, we are seeing a substantial uptick in the number of clients exploring and pursuing all the tools in the philanthropic toolbox in service of their charitable mission. One of those tools is impact investing. High-net-worth and ultra-high-net-worth donors are beginning to see the value of using some of their capital, their financial investments, as another way to address the issues they care about most. They are taking a stand for change by putting their philanthropic capital to work in service of their mission. Whether they are making direct investments in social enterprises; choosing environmental, social and governance investing; or seeking investments aligned with sustainable development goals, they are seeking an expanded approach to reaching their charitable giving goals. Donors are finding themselves acting as shareholder advocates in proxy voting, providing program-related investments or participating in community development banks. Each of these strategies, despite their differences, is helping the philanthropic investor effect change.
The tremendous growth in the impact investing market is highlighted in the US SIF Foundation’s 2018 biennial “Report on U.S. Sustainable, Responsible and Impact Investing Trends,” which found that SRI assets now account for $12.0 trillion—or one in four dollars—of the $46.6 trillion in total assets under professional management in the United States. This represents a 38% increase from the $8.7 trillion in 2016. According to the 2018 UBS “Investor Watch Survey,” the U.S. adoption of sustainable investing is expected to increase by 58% in the next five years, a trend that is often driven by the charitable impact goals of millennials and women.
As impact investing grows in market share, there is an opportunity for advisors to marry their clients’ charitable mission with their impact investing strategy more intentionally.
What we often suggest, as part of building an impact investment strategy, is that advisors should understand their client’s philanthropic strategy: what they are giving to, how much and why, and what they care most deeply about … the mission for their giving. In this way, clients have an opportunity to leverage their assets. More often than not, a client’s charitable gifts and invested assets are working at cross purposes. Money is given away in the form of grants/contributions on one side of the house and invested on the other side, but the two seldom have direct commonalities of purpose.
In real terms, a private foundation has to give away a mandatory annual contribution of 5% of its market value … but what is happening with the other 95%? Marrying the mission of a foundation’s philanthropic efforts with the investment strategy means greater impact. This is true whether the vehicle is a private foundation, a donor-advised fund, a trust or a personal checkbook. Jed Emerson, a consultant, author and longtime proponent of impact investing in philanthropy, puts it this way: “You can’t grant your way out of poverty or solve the climate problem with grants alone.”
The idea of linking financial investments with charitable investments is not very new. A decade or so ago, Judith Rodin, then the Rockefeller Foundation president, and Margot Brandenburg, a Rockefeller colleague, wrote a book entitled The Power of Impact Investing: Putting Markets to Work for Profit and Global Good. The book addressed the ways in which investments could jump-start the mission and focus of foundations and the different ways to interpret impact investing. In fact, the Rockefeller Foundation coined and popularized the term “impact investing.”
So how can an advisor more thoughtfully and intentionally connect charitably inclined clients to explore impact investing? Or how can advisors broach the subject of philanthropy in the context of their clients’ impact investing strategy?
First, the more the advisor knows about what a client is doing or intending to do with his or her assets available for philanthropy, the more thoughtful and robust the conversation can be about how to direct the impact investment portfolio.
It is also important for an advisor to do these other things:
• Advisors must find out whether the clients are interested in moving the needle faster and in a more comprehensive fashion using all of the tools and tactics at their disposal to advance their charitable intent.
• Advisors must determine, with the larger financial picture in hand, how much money—what portion of the assets or endowment—will be deployed using an impact investing strategy.
• Advisors must have a thorough understanding of the various ways in which impact investing and other tools can be put to work to advance clients’ philanthropy.
• Advisors should have up-to-date knowledge on resources that clients can explore as they are deliberating or deepening their impact investing strategies, including knowing the impact investment options that are available “in-house” or in partnership with other firms. A reputable resource for advisors and clients alike is Mission Investors Exchange (https://missioninvestors.org/about).
• Advisors should be able to anticipate the key questions that always come up around impact investing. Will clients compromise on returns and how do they evaluate the social or environmental impact they are making? This is still a work in progress—the field is comparatively young—though there are some evaluative rubrics and metrics that are being employed by philanthropists and their advisors.
• Advisors should be able to grow networks, ensuring that they have philanthropic experts in their circles of allied advisors that they can call upon as partners and resources for clients. Having peers who are working at the intersection of philanthropy and impact investing is important as well.
• Advisors must understand how a philanthropic strategy is created and the processes connected to implementing that strategy. Not surprisingly, both impact investment and philanthropic advisors follow very similar decision-making processes: identifying deals/investments or grants; conducting due diligence; and reviewing projected outcomes and evaluating follow-up reporting to ensure that their investments and their grant-making will achieve their clients’ financial, social or environmental impact.
• Advisors should ask questions or bring in philanthropic experts to contextualize the conversation with clients with charitable intent. It doesn’t matter whether they have formal vehicles such as a foundation, trust or donor-advised fund or are making gifts from their personal checkbook, or have no vehicle at all. But advisors should have “the conversation.” What are the clients’ values? What do they care about deeply? What is their charitable mission? Key elements of the philanthropic mission that can be aligned with impact investments include the populations served, the geographic focus reached and the social and environmental problems they are seeking to address.
• Advisors should choose the strategies that make the most sense for clients—the ones that best reflect clients’ appetite for financial risk, their beliefs about social change, the impact they are seeking to generate and how hands-on they want to be with their investments.
• Advisors should know how involved the next generations will be in the family philanthropy, and know whether they want those generations involved in the investment strategies as well. Be prepared for the strong probability that the next generation will want to understand how the charitable capital is invested.
• If clients have been engaged in philanthropy that is more formal for some time, advisors may want to encourage them to do a full assessment of their grantee portfolio to see if some portion may benefit from a complementary “impact investment.”
Not only will this approach and these key questions resonate with high-net-worth and ultra-high-net-worth clients who are charitably inclined, but the responses will also provide a baseline of data for creating an impact investment portfolio that is both meaningful and measurable.
Once the due diligence of suitable impact investments is done, then it is important to develop or modify an investment policy statement and ensure that it is approved to codify commitments and performance expectations. There will need to be explicit reporting for impact statements, scored to the investment policy statement, just like there are at traditional annual investment review meetings. These performance discussions will be different from typical investment reviews and will require more engagement with the client (or the client’s board) and with the advisors or staff to the client on the philanthropy side to ensure that grant-making and impact investing are indeed working together toward the client’s charitable goals.
The intentional weaving of philanthropy into an impact investment plan can help the investments actually achieve their intended goal, with more dollars going to solutions and more communities globally benefiting. And all of this can be done without impairing return (assuming these expectations have been set). Stepping up your game and adding a conversant philanthropic thread to your engagement with clients is where they want you to go and who they want you to be … their trusted, knowledgeable advisor who is first committed to their success. After all, deploying capital in service of both social and financial returns is a great deal—for anyone and everyone.
Betsy Brill, an internationally recognized expert in philanthropy, is president and co-founder of Strategic Philanthropy, Ltd., in Chicago. She will be speaking at FA’s Invest In Women conference in April.
