CHARITABLE BUSINESSES
CHARITABLE BUSINESS VENTURES AND
IMPACT INVESTING
Impact investing refers to investments “made into charitable companies, organizations, or funds with the intention to generate a measurable, beneficial social or environmental impact alongside a potential financial return.” Impact investments can be the vehicle to provide charitable capital to address social and/or environmental issues. This is an ideal path for individuals in developing countries who have an ability to start a new venture with the intention of lifting their fellow citizens out of poverty, or they simply want to make their community a better place.
Impact investors actively seek to place capital in businesses, nonprofits, and funds in meaningful industries. These industries include renewable energy, basic services including housing, healthcare, education, micro-finance, and sustainable agriculture. Institutional investors, most notably from North American and European finance institutions, pension funds, and endowments have played a leading role in the development of impact investing.
IMPACT INVESTING
Impact investing is often referred to as socially responsible investing (SRI), but while the definition of socially responsible investing focuses on the avoidance of harm, impact investing actively seeks to make a positive social impact by investing, for example, in companies that benefit the community or in clean technology enterprises.
PASSIVE vs ACTIVE
Impact Investing covers several different types of investment options that can be categorized into two primary groups: Passive or Active Charitable Investments.
PASSIVE
ACTIVE
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The “feel good” investments- investors feel good about their investment even if the investment return is a little less than market rate. Investments that do no harm and focus on securing investment pools that do not invest in tobacco, alcohol, pornography etc. These funds express some level of concern for society but do not necessarily promote a social impact. MISSION RELATED INVESTMENTS These investments may produce slightly below market rates because they support and do not jeopardize the furtherance of the private foundation’s charitable purposes. The focus is primarily on return, low risk and liquidity with some alignment with the foundation’s charitable purpose. Investments are usually in larger companies or mutual funds that have some social impact, but the social impact is not the primary purpose of the investment. Financial return is still the major purpose. Little monitoring by the Foundation is done of the investment for either business or social impact. PROGRAM RELATED INVESTMENTS These are now allowable under private foundation rules for investments, the primary purpose of which is to accomplish one or more of the purposes described in section 170(c)(2)(B), and no significant purpose of which is the production of income or the appreciation or property. Focus is on the charitable purpose of the investment, and though return is important, it is secondary to the charitable purpose of the business or businesses. Charitable impact does not need to be measured and reported, just recognized.
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The doing good investments – investors are more concerned with the actual social impact of the business receiving the investment, even if it never makes a profit.
SOCIAL IMPACT POOLED INVESTMENT
This investment is actually a mutual fund of investments in several different businesses where the stability and success of the underlying businesses, along with a charitable purpose, is the primary objective. A modest return is expected but is secondary to the social impact. Each business involved will have a significant charitable purpose that is being addressed, measured and reported. The Fund Investment Advisor is responsible for choosing and monitoring the companies involved, from both a due diligence and social impact concern, and a return is also expected for the fund. The Advisor is also responsible for ongoing due diligence on the companies in the fund and monitoring the social impact. The main focus is on successful businesses in the third world that also accomplish significant social impact. Reporting includes both measuring and achieving of the charitable impact as well as the financial success of the companies and the return on investment.
DONOR DIRECTED INVESTMENT
In this type of investment the donor has established a Donor-Advised Fund and has identified a business that is dedicated to charitable purposes in which he or she would like to invest. The Foundation does due diligence on the business and confirms that the charitable purposes are in alignment with one or more of the Foundation’s nine charitable purposes, and then it directs money from the Donor-Advised Fund to the business as either a loan, charitable gift or an equity investment. The donor may be responsible for monitoring the business and reporting the social impact back to the Foundation, or the Foundation will set up reporting mechanisms from the company to ensure that charitable objectives are still primary and progress is being made. The Foundation’s primary concern is the social impact, not the financial return.
CHARITABLE BUSINESSES
Profits from the business that are due to the investor are typically split between the investor and the paired ministry or are used to expand the faith community’s outreach. Equity investments in the business/ministry partnerships will typically range from $10,000-$100,000 which is the hardest money to get for companies in the third world, where bank loans are difficult, expensive, unavailable and venture capital is nonexistent.
Profits from the business that are due to the investor are typically split between the investor and the paired ministry or are used to expand the faith community’s outreach. Equity investments in the business/ministry partnerships will typically range from $10,000-$100,000 which is the hardest money to get for companies in the third world, where bank loans are difficult, expensive or not available and venture capital is nonexistent.