Donor-advised funds make it easy for charitable donors to set aside money they can later distribute to nonprofits or mission-aligned for-profit companies. A small but growing number of donors are now realizing they can also potentially make an impact on the front end depending on where they park their donor-advised fund assets prior to distribution.

Cornerstone Capital Group, a New York-based RIA firm that focuses on impact investing and sustainability, is starting to see some of this stepped-up interest.

Its public-charity clients that host donor-advised funds are hearing their donors say they want to see more options for impact investing, says Katherine Pease, a managing director and head of impact strategy for Cornerstone Capital Group. Some of the firm’s individual investor clients have asked about including an impact lens in their donor-advised funds.

“Individuals and families with charitable intent are increasingly realizing how much more impact they can be having with DAFs if their DAF assets are being invested for impact as well as for grants,” said Pease, lead author on Cornerstone’s report “Mobilizing Donor Advised Funds for Impact Investing.” It’s also a way for people to mesh their investing activities with their values, she noted.

Overall, though, impact investing in donor-advised funds remains “a very underutilized tool,” she said. “There’s over $100 billion in DAF assets, most of which is not being invested with impact intentionality.”

She’s trying to change this by helping clients (donor-advised fund hosts and users) understand their options and figure out their impact thesis.

The best strategies to use for impact are where there are natural payer opportunities, said Pease. These opportunities often focus on conservation and economic development, she said, such as investing in affordable housing projects that will collect rent or providing low-cost loans that’ll be repaid with interest. This capital can then be recycled to help support donors’ future philanthropic or impact priorities, she said.

According to Pease, donor-advised-fund capital can be deployed in eight different types of vehicles to achieve financial and impact goals. They include direct investments in social enterprises, specialized pooled funds, funds for specialized initiatives, loan guarantees, endowments invested for broad social impact, endowments invested for specific impact priorities, advisor managed funds and corporate donor-advised funds.

A donor’s impact priorities should be matched with the right vehicle, she said. Someone with a specific mission goal (such as helping women in a local community) might be most comfortable making a direct investment in a social enterprise. A donor with a broad interest in climate change may be happier investing in a pooled fund.

So far, Pease has mostly seen loan guarantees used around economic development in low-income communities that lack access to capital. Loan guarantees can be used to underwrite the risk and make the investment safer for traditional investors, she said.

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