Philanthropy Impact

Inspiring philanthropy and social investment across borders, sectors and causes

A philanthropist’s perspective: how to maximise impact using social impact investment

Impacting investing: trends, issues and capabilities

Magazine article

 

 

 

 

A growing number of philanthropists are exploring innovative ways to maximise the value of their donations by making social impact investments from a Donor Advised Fund (DAF) account. A subset of impact investing, social impact investment is ‘intentional … and dedicated to delivering a measured, deep and lasting positive social impact, whilst providing financial returns’.1

About the donors:

Donor A has been making social investments for over five years and recently set up a DAF account.

Donor B set up his DAF account over a decade ago and is an experienced philanthropist and social impact investor.

Donor C has been making social impact investments through his DAF account for 15 years.

Donor D set up his DAF account nine years ago. He is a dedicated investor and philanthropist.

Donor E has been making social impact investments through her DAF account for two years.

Social impact investment opportunities are wide ranging across the return continuum. Some investments have the potential to deliver significant impact at the same time as targeting market rate risk-adjusted returns. Other social impact investments may require more flexible capital to deliver their intended impact, where target return targets are sub-market or unproved.

While investing across the return continuum can help philanthropists better align their investments with their charitable objectives, they are particularly well positioned to make the riskier sub-set of social impact investments where financial return targets are either sub-market or unproven. Philanthropists also recognise that social impact investment can help social enterprises and charities become more sustainable, and in turn deliver better social outcomes.

What’s particularly compelling for donors making social impact investments from their DAF account, is the opportunity to reinvest their original donation once it’s been repaid. This has the effect of multiplying their original investment as well as the potential to deliver impact many times over. We have spoken to a range of donors making social impact investment from their DAFs so we can gain insights into their motivations and experiences of investing in this way to help increase their impact and support the causes they really care about.

What was your motivation for setting up a DAF account?

Donor A: I set it up as a mechanism to contribute to the Charities Aid Foundation (CAF) Development Fund.

Donor B: At the beginning of the year it forces you to think – how much am I going to give to charity? It’s a good mechanism for disciplined giving.

Donor C: I set up a DAF account around 15 years ago primarily to make donations.

Donor D: I was extremely busy with my career, but I knew that one day I would want to focus more on my philanthropic giving. It made sense to set up the What was your motivation for setting up a DAF account?

Donor A: I set it up as a mechanism to contribute to the Charities Aid Foundation (CAF) Development Fund.

Donor B: At the beginning of the year it forces you to think – how much am I going to give to charity? It’s a good mechanism for disciplined giving.

Donor C: I set up a DAF account around 15 years ago primarily to make donations.

Donor D: I was extremely busy with my career, but I knew that one day I would want to focus more on my philanthropic giving. It made sense to set up the account back then as I would benefit from a good level of tax relief and Gift Aid.

Donor E: I am not a millionaire, but I do give regularly. I think a DAF is a cool way to give to charities and can make my money go further. 

What was your motivation for making social impact investments?

Donor A: I see it as a part of my philanthropic activities, rather than my investment portfolio. I believe giving people a hand up is better than just donating.

Donor B: I think that social impact investment offers more hope to society than traditional philanthropy. It helps organisations to become more sustainable.

Donor C: I thought it was an interesting way to make my philanthropic funds go further. In the worst case, in the event that some of the loans were not repaid, I would in effect be making a donation to underlying charities.

Donor D: I was attracted to the recycling of funds, amplifying economic reach and social impact.

Donor E: It just so happens that the charities I would like to support were raising social impact investment at the time.

What type of social impact investments have you made so far using your DAF account?

Donor B: My own account has four equity-type investments and four bond investments. They are all interesting investments, doing noticeably useful work in the local community which is what a charity should be trying to do.

Donor C: Over the years, I have invested in a number of different funds through my DAF account, ranging from lower risk working capital lending, to high-risk development loans, and a fund focused on community housing projects.

Donor D: I am quite early in my social investment journey. I have put money into 1to4 GiftVest and I am now considering a development impact bond.

Donor E: I have made one social impact investment through my DAF account into an organisation that invests in microfinance institutions and organisations active in sustainable agriculture. 

How would you describe your experiences so far?

Donor A: Being able to recycle my money is a wonderful thing. My initial investment of £2,500 has provided 98 loans to more than 500 individuals and small businesses. After the loans get repaid, I can relend to more people.

Donor B: My experience of lending and investing money is much more rewarding than simply giving money away.

Donor C: I initially made a £1.5m allocation for social impact investment through my DAF account. Since then, the funds have been recycled many times, enabling a total commitment of £6.6m in more than 400 deals.

Donor D: The experience has been positive so far; I am learning and I think social impact investing is an exciting field with lots of opportunities.

Donor E: My experience has been positive so far and I hope to make more social impact investments on a more regular basis later in life. I would definitely recommend other donors to consider using a DAF to make social investment.

What would make it easier for donors to make social impact investments via DAFs?

Donor A: Size of investment is still a barrier, as many opportunities have a high minimum investment amount.

Donor B: The single biggest improvement in making it easy for people is to make them more aware of DAFs. In respect to social impact investment, we don’t yet have a fully flourishing marketplace, it’s quite immature and nascent and needs to mature.

Donor D: I do think the cost of making social impact investment is high in some cases and I always want to make sure the risk-adjusted impact is worthwhile. 

Conclusion

The experiences shared on making social impact investment from DAF accounts were overwhelmingly positive. It’s helped donors engage with their philanthropy in different and exciting ways and the most rewarding thing of all is the opportunity to help more people through the recycling of their donation many times over.

It’s clear that one of the main benefits for philanthropists choosing to set up a DAF account is to help make the process of tax-efficient giving easier. But while the experiences of the donors we’ve spoken to has been positive, more can be done to help philanthropists make social impact investments, in part by raising awareness of this growing sector. Surprisingly, most money held in DAFs is invested with little or no consideration at all for impact.

Although traditional investments potentially offer better risk-adjusted returns, they don’t intentionally further the social objectives of the donor. In some cases, they may even be in direct conflict with their personal ethics or values. If a donor chooses to make social impact investments, they can achieve a financial return whist staying true to their values and philanthropic objectives. Professional advisers play an important role in helping their clients navigate the wide range of social impact investment opportunities available. They should help clients achieve their social as well as financial objectives by utilising all the tools available, including social impact investing. By building an understanding of the social issues that their clients are trying to address, advisers will be better placed to recommend suitable social impact investments that can help them maximise their impact.