ESG Investing

The Unique Power of Program-Related Investments


Program-related investments (PRIs) by private foundations go back more than five decades, when the US Tax Reform Act of 1969 granted them special legal status. Even as impact investing options for foundations have multiplied, newer approaches have not supplanted PRIs or overshadowed their unique advantages in solving some of the world’s most pressing problems.

What Are Program-Related Investments?

The IRS has set three criteria that foundation investments must meet to be considered PRIs:

  1. The main purpose of the investment must be to achieve one of the tax-exempt goals of the foundation.
  2. Generating income or gains in the value of property cannot be a main aim of the investment, although it may generate market-rate or above market-rate returns.
  3. The investment cannot be made for the purpose of lobbying or promoting a political campaign.

Foundations can make PRIs without incurring an IRS penalty for “jeopardizing investments,” which would otherwise apply if a foundation were to invest its endowment without appropriate attention to its financial well-being.

Because PRIs are not subject to the same pressure to generate returns as other investments, they have the unique potential to serve as catalytic capital.

Program-Related Investments vs. Mission-Related Investments

Private foundations are required by law to distribute at least 5% of their assets every year through grants and other forms of charity. PRIs can count toward that requirement. A foundation is free to dedicate more than 5% of its assets to PRIs if its trustees choose.

PRIs differ from mission-related investments (MRIs), which are impact investments typically made from a foundation’s endowment to further its mission. MRIs usually seek market-rate returns, and they lack special recognition from the IRS.

PRIs and MRIs are complementary tools. As foundations find new ways to incorporate environmental, social, and governance (ESG) criteria into their risk-adjusted endowment investments, they may opt for a mix of PRIs and MRIs rather than rely on PRIs alone. However, PRIs offer some advantages that make them especially well-suited to achieving certain impact objectives.

Program-Related Investments Make Bold Innovation Possible

Because PRIs are not subject to the same pressure to generate returns as other investments, they have the unique potential to serve as catalytic capital. Deployed in situations where risks are high or unknown, catalytic capital can act as funding that allows a new venture to get off the ground or to scale up until it can become self-sustaining. It can also accompany other sources of funding in order to absorb risk or lower the cost of an initiative, perhaps making it more attractive or feasible for other investors.

Catalytic capital may take many forms. For example, the Bill & Melinda Gates Foundation employs direct equity investments, fund investments, low-interest loans, and sales volume guarantees. It sometimes awards grants in conjunction with its investments.

Foundations have leveraged PRIs to catalyze impact in many areas. The MacArthur Foundation invested in 21 housing developers and 18 financial intermediaries to preserve 300,000 affordable rental units. The Venn Foundation uses PRIs to extend “lifeline” loans with low interest and no required collateral to nonprofits. The Community Loan Fund of New Jersey offers loans, technical assistance, and training to construct or renovate childcare centers located primarily in low-income neighborhoods.


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