moneyheartAmericans contribute more than any country per capita – both in time and treasure. In fact, the U.S. philanthropic sector is extraordinary by any world standard. This is as much a product of our national charity-driven culture as it is a result of our federal tax policies, even with the new tax law, that encourage not only philanthropic giving, but also social investing as well. 

Recently, the IRS and the U.S. Treasury Department made it even easier for private foundations to achieve greater charitable outcomes. When you think about foundations, you naturally think about funds used to make grants to the community. However, foundations have other means to affect change – their investment capability – which provides a return and allows them to build their endowment. Recently, impact investors have been working with foundation leaders to leverage these funds using PRIs (Program-Related Investments) to enhance both charitable and financial outcomes. PRIs are loans or equity investments made primarily for charitable purposes; however, because they are an investment, they can generate positive or negative financial returns. In April 2016, the U.S. government published long-awaited regulations and examples (e.g., investments in low-income housing and small businesses, low-interest loans to needy students) on PRIs.

Similarly, MRIs (Mission-Related Investments) also seek a dual outcome, but can be any type of investment where the intention is to earn both a social and a financial return. PRIs and MRIs are often called “double-bottom-line” investing. In 2015, the IRS and the U.S. Treasury issued guidance on MRIs (e.g., equity investment in a social enterprise or socially responsible company). A great summary of this guidance can be found on a 2015 webinar by the Council on Foundations. Taken together, these moves by the U.S. government clarified some of the inherent ambiguity of these investments within the tax code, giving foundations greater comfort to structure the right deals. It also sends a clear message to foundations that they can use all the tools at their disposal to benefit the community.

Large national foundations, such as the Bill & Melinda Gates Foundation and the Rockefeller Foundation, have been utilizing PRIs for the past decade with great success. For example:

The Bill & Melinda Gates Foundation released a report on its work in Stanford Social Innovation Review citing impact investments through its Strategic Investment Fund totaling more than $2B to international causes fighting poverty. From biotech start-ups to financial asset builders, they used debt, equity and other impact tools to augment their traditional grants. By using PRIs, they were able to pursue social impact as well as financial impact more aggressively. In a recent Q&A, Andrew Farnum, director of the Fund, shared his philosophy: “Markets don’t always work well for the poor, as we say. Left to their own devices, there is not likely to be a market incentive for a company with a new drug discovery technology to apply it to the diseases of the poor. So we said: How can we form partnerships with those companies to get access to that technology for the diseases and the populations that we care about? We used all the tools of capitalism.” The Bill & Melinda Gates Foundation continues to spur discussions on how to use these tools to solve market failures and bring additional resources to communities.

The Rockefeller Foundation, a thought leader in impact investing for foundations, released an e-book in May 2014 about their lessons learned on PRIs. They funded an independent evaluation of their portfolio of 18 domestic and international deals worth almost $24M. In this evaluation, they gleaned four main insights. First, they found that the Foundation had a catalytic impact by being able to take a riskier position, which then lowered the risk for other investors and ultimately allowed entrepreneurs to attract additional capital. Second, through their reach, foundations also have the ability to help connect entrepreneurs to other important stakeholders. Third, they also found promise in using both grant funds and PRIs as a dynamic duo to support organizations. Finally, the report reinforced the importance of consistent impact measurement. Now, they have launched the “Zero Gap” portfolio focused on bold ideas around the United Nations’ Sustainable Development Goals, including clean energy and blockchain technology.

It is an exciting time in U.S. philanthropy. These rulings, which are now being felt by community-based foundations, open many doors for communities to think about new ways of braiding funding sources to achieve large-scale change and for social entrepreneurs to have access to many more sources of new philanthropic investment. As Judith Rodin, former president of Rockefeller Foundation said, “Philanthropy can take the risks that others cannot or will not.” We need this type of risk capital to fuel social entrepreneurs here and abroad who are fighting for the double bottom line.

If you have a great idea ready for innovative financing, talk to your local foundations about this option. Share these resources and see what you can make happen together. And, if you have worked with PRIs or MRIs, please share your experience with us.

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