The Growth of Donor Advised Funds
When it comes to charitable donations, the increasing importance of Donor-Advised Funds (DAFs) is undeniable. In 2017, DAFs accounted for as much as 7% of total charitable giving and 10.2% of individual giving, rising from just 4.4% of individual giving as recently as 2010 1 In short, Donor-Advised Funds are a force to be reckoned with in the charity space and must be regarded as a major vehicle through which philanthropic giving now occurs.
DAFs operate by accepting funds from donors, who then can take an upfront charitable tax deduction. These donors then recommend how the DAF should distribute the donated funds to nonprofit organizations over time. This eventual charitable distribution usually takes the form of grants. Typically, only a fraction of total charitable assets held by DAFs are distributed within a given calendar year. Grant payout did rise from 20.6% to 22.1% from 2016 to 2017, but considering DAFs held $110 billion in charitable assets, that still amounts to over $85 billion in charitable assets seemingly warehoused in 2017 alone. 2
Challenges Present Opportunities, The Growth of an Integrated Approach
Integrating impact investment options with DAFs can solve two problems at once, generating social impact in the here and now while simultaneously enhancing a fund’s future grant-making capacity.
The fact that there are no shortage of causes that could use capital while many billions of dollars earmarked for charity sit idle, sometimes for years at a time, has led some organizations, such as the Institute for Policy Studies, to levy criticisms towards the growing prevalence of DAFs. 3
Notably, some question the extent to which the proliferation of DAFs in recent years has drawn attention away from more traditional charitable vehicles.4 In addition, given that major players in the DAF world include names like Fidelity, Goldman Sachs, Schwab, and Vanguard, some have also noted an apparent “Wall Street takeover” of charitable fundraising.5
Despite these objections, there is no doubt that DAFs are here to stay as a major force in the charitable donations space. At the same time, there is increasingly a desire of donors to align philanthropic activity with a values-based approach. Integrating impact investment options with DAFs can solve two problems at once, generating social impact in the here and now while simultaneously enhancing a fund’s future grant-making capacity.
Benefits of Impact Investing for DAFs
While each individual DAF will likely identify unique ways in which impact investing can complement and improve their operations and satisfy their donors, we will focus on three broad ways in which DAFs can clearly benefit from pursuing greater integration with impact investing.
1. The flexibility of DAF Capital
Combining DAFs and impact investing allows a greater degree of flexibility for donors looking to make a difference. While grants can certainly be a powerful vehicle for charitable giving, they usually consist of one-time transfers that take time to administer and may have long lead times for generating measurable impact. Given that the scope of grants can be limited, donors may wish to improve the odds that their funds will have an impact before that final grant outlay.
The utilization of impact investments not only keeps the capital moving to different opportunities in the short term while awaiting its final deployment but also gives DAF donors a wider range of causes through which to distribute funds. Donors that consider impact investment options will be more likely to find a suitable match for their particular values and desired charitable ends. In that way, adding more ways in which funds can be productively allocated can only benefit DAF sponsors in attracting donors and give donors the best opportunity to make the kinds of impact they are looking for.
2. Do More Good More Often
As already mentioned, it can often take a long time for DAFs to distribute funds. In the intermediate time period between when funds are provided by the donor to a DAF and its eventual distribution in the form of grants, pursuing impact investment opportunities can go a long way towards helping the capital reach more of those who need it most, increasing the chance of leading to productive or maybe even life-changing outcomes.
To illustrate, with many impact investing platforms centered around supporting the development of local communities, donors with significant sums of money tied up in DAFs can find creative ways to make an impact in their communities through small loans while waiting for large-scale grant-making opportunities that strike their fancy. This can enhance the reputation of the donor or DAF sponsor or simply provide the psychological satisfaction that comes along with making a meaningful impact early and often.
3. Growing Assets While Doing Good
No list of benefits of impact investing would be complete without mentioning that targeted impact investing can earn a return on donor principal while making a difference. Any returns can then be reinvested back into more impact investing opportunities, put towards future grants, or even withdrawn as profit if the donor so wishes.
While there may seem to be something of a disconnect between the impulse to engage in charitable contributions through DAFs and the idea of earning a return on investment, there is nothing immoral about providing capital to entrepreneurs with positive social visions and sharing in their success. After all, a donor who benefits financially from impact investing is free to invest further in the beneficiary of the impact investment or put the returns back into the DAF for future use. Of course, it is also possible to pursue impact investing options that do not promise a return if the donor does not even want the appearance of earning a return on their funds.
Roadblocks to Integration between DAFs and Impact investing
Education about impact investing is likely one of the major obstacles to its successful integration with DAFs. 6 Since donors are largely in control of the funds that they transfer to DAF sponsors, they and their investment managers must be aware of the range of impact investing options available and participate actively in the distribution process. This requires that they understand the process of impact investing separate from the grant-making that DAFs typically engage in and be on board with the mission of the chosen impact investment targets.
Not only must donors sign off on particular impact investments, but the DAF sponsors must be willing to move quickly to take advantage of particular opportunities. Since many DAF sponsors currently require certain account minimums before allowing donors to actively direct funds to opportunities outside those already offered by the platform, such account size restrictions must be decreased or standard offerings must be expanded to encompass more impact investing options. Either way, DAF sponsors are likely to take such actions only at the request of donors, further reinforcing the importance of donor education about the benefits of impact investing.
Active communication between donors and DAF sponsors is vitally important for such changes to take place. While DAF sponsors are largely responsible for identifying impact investing opportunities, the donor is more likely to be supportive if they are sourced for ideas about where funds can best be deployed. In that way, impact investing should be seen as an avenue for collaboration between donors, funds, and capital recipients with the potential to create a substantial value-based impact.
Themed Investment Portfolios & Promise for the Future
While there is no way to predict all of the ways in which DAFs will take advantage of impact investing opportunities in the future, we can look to recent developments that signal potential avenues through which the necessary education and integration can be achieved. For instance, the emergence of themed impact investment portfolios demonstrates a clear solution to the problem of matching the charitable intent of donors with opportunities that are promising, actionable, and aligned with donor values. Such themed portfolios might consist of impact categories such as equitable economic development, environmental conservation, achieving health outcomes, and so forth.7
In addition, there is already a trend of DAFs incorporating impact investing opportunities into their product lineup for those who know where to look. For example, the Triskeles Foundation offers donors the opportunity to invest in funds social outcomes and ESG initiatives. 8 Furthermore, Fidelity Charitable, by far the largest donor-advised fund in the US, also offers a range of dedicated impact investment options. 9
Finally, we’d like to highlight that CNote is already working with DAFs to generate income and impact prior to grantmaking. Our product offerings provide flexibility quarterly liquidity, and a solid return on investment of 2.00%, and, most importantly, a vehicle for driving meaningful change in the economic development of under-served communities across the United States.
With that said, we look forward seeing the further integration of impact investing with donor-advised funds in any way that it may manifest, as we recognize the potential benefits that can arise when we work together to match available capital with those looking to build stronger local communities and in the process contribute to the flourishing of all.