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Donor-Advised Funds May Fuel Impact Investing

Interest in donor-advised funds has grown quickly in the last few years, as more people learn about and embrace this avenue for philanthropic giving. In 2018, the number of individual accounts in these funds climbed by 55%, according to the National Philanthropic Trust. Total assets in the funds reached $121.42 billion that year, and the funds’ grants to charities totaled $23.42 billion.

Although the funds distribute philanthropic grants, they also have an investing component. Some suggest that they present an opportunity for traditional philanthropy and impact investing to work together.

What Are Donor-Advised Funds?

Donor-advised philanthropic funds are charitable giving funds that accept contributions. When a person donates to a fund, the money goes into an account, where it can be invested and grows tax-free. Donor-advised funds make it relatively easy and inexpensive to establish a charitable account, potentially attracting donors who are not ready to establish philanthropic trusts or family foundations but have some money to donate.

After the donor contributes to the fund, the donation no longer belongs to them, though they still have a say in how it is used. Donors can choose how their contributions are invested, and they can recommend charities they would like their contributions and investment returns distributed to. Donors can also decide how much money they would like to direct to each charity. The fund’s sponsor is responsible for managing investments and distributions and has the authority to approve or deny donors’ requests.

One critique of donor-advised funds is that there is no deadline for when money in them must be distributed to charity. Still, some fund sponsors may set minimum requirements to keep an account active, and most donors make regular recommendations for distributing their donations. Since 2014, at least 20% of assets in these funds was distributed to charities each year.

Donors can choose how their contributions are invested, and they can recommend charities they would like their contributions and investment returns distributed to.

Where Donor-Advised Funds and Impact Investing Intersect

Because money in a donor-advised account is invested before it is distributed, donors may place their contributions in impact investments. Some funds offer impact investing options, and sponsors that do not may be persuaded to add them if donors are in favor. Directing contributions to impact investments can multiply the positive effects of each donation, as the money is first used to create impact when it is invested and can then be recycled into successive impact investments before the donation and financial returns go to a charitable cause.

The resources currently held in donor-advised funds are already providing needed capital for impact projects like Benefit Chicago, a social enterprise initiative jointly created by the John D. and Catherine T. MacArthur Foundation, the Chicago Community Trust, and Calvert Impact Capital, which drew on donor-advised funds and raised $100 million. The potential to deploy the growing amount of assets held in donor-advised accounts is promising for impact purposes, given that the world still falls short of fully funding the UN’s Sustainable Development Goals.

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