Partner blog: This blog is in partnership with Impax, an industry leader in investing in the opportunities arising from the transition to a more sustainable global economy.
The wealth management world historically has tended to look at doing good and doing well as two separate activities. To do well, investors put money into opportunities they believed would provide a return; to do good, they put their money into philanthropy.
In recent decades, we’ve seen people merge those two activities with approaches that range from avoiding investments that do harm to making philanthropic gifts that are invested for the benefit of a particular cause or organization.
Today we’d like to make the case for an option that blends these approaches into a strategy that goes beyond “do no harm” and delivers a range of benefits for investors/donors as well as the causes they believe in: donor-advised funds that embrace a social impact investment strategy.
Investing for good
In some ways, social impact investing has its roots in the desire of some shareholders to avoid investing in companies, funds, institutions, and others that are aligned with philosophies, activities, or causes they find objectionable. While it started with primarily a political focus, the divestment (or disinvestment) movement of the 1980s is sometimes seen as the beginning of this trend, evolving over time to embrace a general desire to avoid investments in activities or operations investors oppose on moral grounds. Oil, tobacco, and large-scale farming often have been the target of these efforts.
Over time, this movement gave way to ESG (environmental, social, and governance) investing, which created a framework around a “do no harm” approach, allowing investors to consider how environmental impact, social issues, and governance might affect their interest in a particular investment.
More recently, investors have sought not only to avoid evil but actually to support good with their investment dollars. For example, they might go beyond refusing to invest in companies that do damage to the environment and instead invest in firms that work for ecological improvements, or they might choose not just to disinvest from firms with bad records on gender equity but to actively focus their wealth on companies that work to promote opportunities for women. Because such approaches are seen as leading to a more sustainable society, this is often described as “sustainable investing.”
While investors who embrace sustainable investing might say they are comfortable with slightly lower returns in exchange for knowing they are doing good with their investments, some studies suggest that they don’t have to make that choice. For example, Forbes recently reported that “the Morningstar U.S. Sustainability Index outperformed its non-SRI parent by more than 0.6% and the S&P 500 by 0.7%.”
Investing for impact
The use of personal wealth to support charitable causes has become a key component of Americans’ identity. Investing in ways that strategically support those activities has gained ground in recent years, as organizations and individuals seek ways to build wealth specifically for the benefit of organizations and the causes they support.
In that ongoing effort, donor-advised funds (DAFs) have emerged as the fastest-growing charitable vehicle in the world, and for good reason: They support many of donors’ top documented motivations for charitable giving: supporting an important cause, making an impact, establishing a legacy of giving and tax benefits.
DAFs do all of this through a pretty simple process: A donor makes a gift to a sponsoring charity that then creates a donor-advised fund on the donor’s behalf. The donor gets an immediate tax benefit for the amount contributed and can also avoid capital gains taxes by contributing appreciated assets directly to the DAF. After the DAF is established, the donor can continue to contribute to and receive tax benefits from those ongoing contributions.
Once the funds are invested, the investment proceeds are used to make grants to charitable organizations as frequently or infrequently as seems appropriate. While the donor no longer owns the assets contributed to the DAF, they can guide how the assets are invested and recommend grants made from the DAF to nonprofit organizations that the investor feels passionately about. This power remains with the investor for life and can be passed on to future generations, creating an impact that lasts well into the future.
The double impact of DAFs and sustainable investing
So, how can these two concepts – DAFs and sustainable investments – work together? In a word, effectively.
Allocating assets within a DAF to a sustainable investment strategy can compound the impact of those philanthropic dollars by allowing the donor not only to give resources to the designated charity but to also use the underlying investments to support issues that matter to them.
For instance, a client that cares about the environment can designate their DAF assets to a nonprofit dedicated to combating climate change. To amplify their impact, they can also select an underlying investment strategy that aligns with their goals for minimizing their environmental impact and supporting companies that minimize natural resource consumption.
Impax makes this approach available through investments in resource efficiency and environmental solutions. By investing in companies within environmental markets that are developing innovative solutions, we can calculate the environmental impact supported by our investors when it comes to CO2 emissions avoided; water provided, saved, or treated; renewable energy generated; and materials recovered, or waste treated. These companies also can offer significant growth potential, as they are presenting solutions to global sustainability challenges.
If an investor were to focus their DAF assets on a social issue such as gender equality or the empowerment of girls and women, they could designate a charitable organization to gift to and also select a gender-lens investment strategy for the underlying portfolio.
Investing with a gender lens means investing in companies that are dedicated to advancing equality through a variety of strategies. It could include supporting women in leadership roles, putting in place policies and programs to advance diversity, publishing a pay equity analysis or gender goals and targets, and signing on to the Women’s Empowerment Principals. Studies have shown that increased diversity can benefit performance, and companies with proportionally more women in leadership and management can outperform in quantitative metrics, like share price performance and return on equity, as well as harder-to-quantify metrics, such as improved corporate culture.
As we transition to a more sustainable economy, investors now have the opportunity to invest in alignment with the causes and issues they care about. Using a DAF to make grants to a charity of your choice and investing the underlying assets in a consistent theme allows for a more holistic and impactful approach to philanthropy.
If you would like to equip your team to help investors open DAFs with sustainable impact, talk to our experts at Ren.
The investment techniques and decisions of the investment adviser, including the investment adviser’s assessment of a company’s ESG (Environmental, Social and Governance) profile when selecting investments, may not produce the desired results and may adversely impact performance, including relative to other investments that do not consider ESG factors or come to different conclusions regarding such factors.
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