By: Bruce DeBoskey, Philanthropic Strategist
Increasingly, charitable donors are interested in "impact investing" with their philanthropically committed capital. They seek more creative ways to align their investments with their missions.
Earlier this year, in "All investing is impact investing," I discussed the growing recognition that grants and investments can generate both financial returns and social impact. In this column, I expand on this popular topic.
In the Tax Reform Act of 1969, the Internal Revenue Code permitted a giving vehicle for foundations called Program-Related Investments, or PRIs. A PRI is a method of making capital available to both nonprofits and for-profits that are addressing social or environmental concerns.
PRIs can be part of an integrated strategy, along with grants, to achieve the mission. PRIs differ from grants in an important way. A grant is a "social investment" that produces a negative financial return to the donor. With a PRI, a foundation lends money to, or invests in, a nonprofit or for-profit in a way that furthers the mission and actually provides a financial return to the foundation.
Although PRIs are still relatively uncommon, the Ford Foundation and others have been using them successfully for years.
Detailed proposed regulations that clarify and expand the definition of PRIs were issued in 2012 and should be finalized later this year.
In order to qualify as a PRI, three key criteria must be met:
Examples of PRIs include:
If the PRI meets IRS criteria, the benefits to a foundation and the community can be significant. Such investments:
Although the tax law specifically refers to private foundations, a growing number of community foundations or institutions like the American Endowment Foundation are encouraging the use of PRIs with donor-advised funds.
To learn more, see Mission Investors' Guide to PRIs, Impact Assets, Impact Assets 50, and the Impact Finance Center.
Before establishing a PRI, it is important to seek tax or legal advice to make sure that your setup complies with the law and that "expenditure responsibility" requirements are satisfied.
PRIs help nonprofits solve social problems by using market-based tools, and enable donors to have greater impact by growing and recycling at least a portion of their philanthropic assets for future use.