Let’s say you have a high-net-worth client who cares about wildlife conservation and consistently makes sizable donations to charitable organizations that support preservation initiatives. They hear a local news report about a corroded gas line releasing harmful pollutants into nearby streams and rivers, causing the aquatic life to perish. They then realize they own shares of the energy company responsible for the gas line.

Moral Dilemma: What to Do?
It’s a common conundrum—many people and organizations that want to solve the world’s most damaging and persistent problems have investments as their lifeblood. Those assets need to be invested in order to grow and sustain their philanthropic work. So what happens when donors’ charitable missions are directly contradicted by their own investments?

For foundations, it can sometimes seem as though their assets and grant-making programs are in direct opposition to each other, or at the very least failing to work together to accomplish a charitable mission. And since many foundations invest 95% of their assets while distributing about 5% each year for charitable purposes, it’s even conceivable that the damage done by the investments exceeds the good accomplished by the distributions!

Over the last decade, more donors and foundations have been attempting to address this issue and get all of their horses pulling in the same direction. They want their investments to enhance their philanthropic efforts or at least not run counter to them. And for foundations, if their 5% minimum charitable distribution requirements are regarded as the “do good” portion of their portfolio, the goal for the other 95% might at least be conceived as “do no harm.” Hence, the adoption of “impact investing,” a widely popular investment strategy that aims to generate a positive social or environmental impact in addition to providing a financial return.

Some impact investing approaches are relatively straightforward, while others are more complex and carry additional risks. Below we outline four distinct approaches, ranging from fiscally conservative to financially risky, that can help ensure that assets earmarked for charitable use are serving the greater good.

1. Community Investing: A ‘Safe’ Introduction
One of the easiest ways for a committed donor or private foundations to dip a toe into impact investing waters is by simply moving their money from a traditional bank to a community development financial institution (or CDFI) such as a community bank or community credit union. These financial institutions are common throughout the United States, and you’ve probably heard of them without realizing that they have a social mission tied to their financial products.

The real difference between traditional banks and community banks is what they do with the money on deposit. Rather than lend it to large corporations outside the local vicinity, community banks invest it locally through loans for affordable housing projects, home mortgages in low-income areas and new businesses.

Community investing can be a relatively low-risk cash management strategy, an easy way for a foundation or philanthropic individual to put more financial assets in the service of a charitable mission. To look for a CDFI in a specific community, go to www.cdfifund.gov for a listing of these institutions by city and state.

2. Socially Responsible Investing: ESG Screening
The concept of socially responsible investing (SRI) has been around for more than 30 years. It began with a simple idea: Don’t hold the stock of companies that actively work against your values. So environmental grant-makers might screen “big oil” out of their portfolios and health grant-makers might avoid “big tobacco.” Such tools to filter investments have been dubbed “negative screens” because they focus on what investors don’t want in their portfolios, like companies with interests in gambling or child labor.

In recent years, however, investors and their advisors have taken a new approach to SRI, one that involves “positive screens” that actively seek companies demonstrating the kind of corporate social responsibility that philanthropic investors would like to encourage. The primary positive screens are based on environmental, social and governance (ESG) practices, collectively known as “ESG screening.” So rather than focus on what you don’t want companies to do, ESG screening selects companies based on the positive things they’re doing.

Historically, there was a view that investing with an SRI or ESG lens meant getting concessionary returns in order to achieve both a financial gain and a social benefit, but many impact investments deliver risk-adjusted market rates of return across asset classes. Done well, investing in ESG-screened companies and funds can be a natural part of an investment strategy that carries no more risk than traditional investing in the stock market.

3. Program-Related Investing: Banking To Grantees
When we think about supporting a charitable cause, most of us think in terms of gifts—money given away with no expectation of it ever coming back. Private foundations offer a unique tool kit that helps philanthropists pursue their missions in a variety of ways. For instance, foundations can make loans, provide loan guarantees, and make equity investments in support of their mission. Such loans are defined by the IRS as program-related investments (PRIs) and are an increasingly common tool among private foundations.

These investments come out of the foundation’s grant-making purse and thus satisfy the foundation’s 5% minimum distribution requirement. However, while grant dollars go out the door never to return, program-related investment dollars are treated as assets on the foundation’s balance sheet and the investments are generally recovered in part or in whole. In some cases, a PRI may even generate a return for the foundation in the form of interest or appreciation. Importantly, the primary objective of a program-related investment must be to significantly further the foundation’s charitable mission, and securing a financial return must not be a significant driver for making such an investment. Because PRIs fulfill a charitable purpose, they are not subject to the jeopardizing investment and prudent investor rules applicable to traditional investments.

Foundations use PRIs creatively in myriad ways. Most first experiment with them in the form of a loan to an organization they already know well, oftentimes a prior grantee. For example, a foundation may offer a community church a very low-interest unsecured loan to finance the construction of a new facility. Or it may provide a no-interest line of credit to a favorite art museum to help smooth out the bumpy financial times between blockbuster exhibits. A foundation may even guarantee a loan that allows a housing agency to gain access to funding from a commercial bank, which, as long as there isn’t a default, doesn’t require the foundation to put a dime out the door.

4. Mission-Related Investing: Graduating To The Big Leagues
Traditionally, philanthropists give money away and investors make money. The former want to create change and the latter want to pocket it. You’d think that the two goals would be incompatible, but a new hybrid of philanthropy and private equity investing blurs the lines, allowing foundations to do well by doing good.

It’s called mission-related investing, and in this approach, foundations use their endowment funds to invest in profit-seeking solutions aligned with their mission.

The approach is similar to the one used in private equity investing: Foundation donors in this case make investments in private companies or venture capital funds—the difference being that these investments go beyond mere financial returns to provide social and economic benefits.

These investments don’t qualify as program-related investments because obtaining a financial return typically is at least as important to the foundation as obtaining a social return. Mission-related investments are instead used to address social, environmental and economic challenges that cannot be easily tackled by grants alone.

Mission-related investments may be made by foundations in a variety of ways. The three main approaches are: (1) by buying stock in a well-established company that’s aligned with their mission; (2) by investing in a social investment fund; and (3) by angel investing in startup companies that have a social mission.

Keep in mind that mission-related investments, unlike PRIs, are subject to jeopardizing investment rules and that a private foundation can be subject to excise taxes for making imprudent investments. For this reason, involvement in mission-related investments should be based on a well-considered investment policy that includes a thoughtful asset allocation strategy using different classes of risk.

For donors looking closely at their current investment portfolio and finding a lack of alignment with their philanthropic objectives, there are many options to put both pools of assets to work for positive social outcomes. From relatively low-risk cash management options with community development financial institutions to high-risk angel investing in social enterprises, both casual and experienced givers can become impact investors. The key to success is to take an incremental approach, starting with a small portion of assets at first and expanding as they gain experience and confidence.

Jeffrey D. Haskell, J.D., LL.M. is chief legal officer for Foundation Source, a provider of specialized support services and technology for private foundations.