Seth Goldman, co-Founder and TeaEO of Honest Tea, was already giving philanthropically when he sold his company to Coca Cola, but he wanted to do more. Having bootstrapped Honest Tea to success, he wanted to provide seed stage investments to a next generation of sustainable food and beverage businesses.
Since then Seth has made multiple investments into early stage companies, while also making charitable donations. Should the risks pay off, he won’t pay a penny in taxes because the returns will go right back into the donor-advised fund (DAF) he used to make the original investments. And, he’ll have used the invested portion of his DAF to have an impact aligned with his values, putting more capital to work towards his philanthropic goals to complement his charitable gifts.
Financial advisors have likely heard plenty about why opening a DAF now or increasing the contribution to an existing one is good advice for clients who are concerned about pending changes to the tax code. But DAFs offer a much larger opportunity than a place to store money. Indeed, they’re a powerful vehicle that can be uniquely sculpted to further your clients’ personal philanthropic mission.
A donor-advised fund is a tax-preferred philanthropic vehicle similar to a private foundation. A donor can establish a DAF with an initial tax-deductible contribution, and then advise on charitable gifts to other nonprofits throughout the life of the fund. Donor-advised funds can accept traditional and non-traditional assets including cash, appreciated securities, real estate and non-publicly traded assets, addressing a variety of tax concerns for clients. Assets within the DAF are invested for financial return that will sustain the fund for the long-term.
Impact DAFs
The newest development in donor-advised funds employs impact investing, which enables fund owners to maximize their impact on the social problems they’re passionate about. This can be an ideal solution for financial advisors with clients who are expressing interest in values-aligned investments, as impact investment DAF providers bring an expertise that can help navigate the fragmented and complex market of impact investing.
The invested assets of a DAF can be placed in a range of investments that provide a positive social and environmental return, as well as financial return. Seth Goldman uses his DAF to philanthropically support nonprofits, and he is also able to make equity and debt investments into sustainable food and beverage businesses using the same vehicle – ImpactAssets’ Giving Fund.
Financial advisors who can educate clients on this holistic approach, referred to as an “impact strategy”, are increasingly able to differentiate themselves from the crowd and appeal to the next generation seeking financial advice.
ImpactAssets, RSF Social Finance, Tides Foundation, and some community foundations are among a select group of specialized providers that are pioneering the practice of a unified portfolio approach to impact. Such a comprehensive impact strategy is not available through most commercial DAF providers.
Donor-advised funds are especially suited to an impact investing strategy for a number of reasons:
• Many DAF providers are small and nimble philanthropic institutions and well positioned to take on innovative strategies for advancing social and environmental agendas.
• Depending on the charitable purpose of the DAF, below market investments—if selected—are exempt from the traditional regulations regarding prudent investor requirements.
• With a lower administrative cost level than that of most foundations, DAFs make it possible to spend more funds on due diligence and research to help ensure an effective impact strategy.
• If a donor selects a DAF provider with expertise in a certain area, the process is simplified, frictionless and extremely cost effective.
RSF Social Finance started its donor-advised fund in 1984 as part of its strategy to provide impactful organizations with a variety of funding options and investors an opportunity to engage in whole portfolio activation. Managed within RSF’s Liquidity Portfolio or Impact Portfolio, donors invest their assets in alignment with RSF’s mission of transforming the way the world works with money.
Although the majority of grantmaking from DAFs is donor-directed to specific charitable organizations, a unique feature for donors with RSF is the option to make a grant to the RSF Seed Fund. This discretionary fund provides small grants (between $500 and $5,000) to seed new initiatives that further the field of social finance, or address issues in one of RSF’s three focus areas: Food & Agriculture, Education & the Arts, or Ecological Stewardship.
Another option makes it possible for financial advisors to work closely with clients to craft an impact strategy that is unique to their interests, focusing on particular issue areas or geographies. ImpactAssets’ Giving Fund gives DAF owners access to private debt and equity funds from top impact investing fund managers, and individual debt and equity deals, like the investments made by Seth Goldman.
The Giving Fund has investment options with a range of risk and return across various asset classes so that financial advisors can help clients identify impact investments that fit within their portfolio and customize the impact approach for each client.
The Tide Foundation’s DAF option gives advisors of progressive donors access to the broad range of work that Tides does to support existing social change efforts or even launch their own project. Tides donors have initiated and made significant investments in film related projects, including The Story of Stuff, Taxi to the Dark Side, Amreeka, and the production company Chicken and Egg Pictures.
DAF providers that offer impact investing enable clients to both maximize their giving dollars and make the greatest positive impact possible.
Tim Freundlich is president of ImpactAssets, a nonprofit financial services firm that increases the flow of capital into investments that deliver financial, social and environmental returns. Its impact investment strategies, donor advised fund and knowledge resources provide a dynamic platform for wealth managers and the clients they serve to advance social or environmental change through investment. ImpactAssets seeks to shed light on—and drive capital to—the field’s most promising organizations and initiatives, helping to build the field of impact investing.