By Abby Rolland
When one thinks of private funders and the tools they have to give back, one may first think that it is limited to giving grants, or grantmaking.
While grantmaking remains the most common way for funders, specifically foundations or donor-advised funds, to further the causes that they care about, there are other ways for foundations and families to utilize their assets to serve their communities. We discuss grantmaking, as well as several other approaches, below.
1) Grantmaking
Grantmaking is the most common way for funders to make a difference.
When a foundation is established, they set up an endowment, or a pool of assets that is invested. Every year, they are required by law to distribute at least 5% of those assets,* with the assumption that the market (while volatile at times) will grow enough to cover the 5% of distributed assets. Thus, the foundation’s assets will/should “remain at the same level” at the end of the year, despite its giving, thus the entity could exist and give in perpetuity.
Distributed assets are designated for a charitable purpose and when given out, are known as grants. 501(c)(3) public charities are the most frequent recipients of grants; however, grants can also be given to fiscally sponsored organizations, supporting organizations, other 501cs (within legal limits), and non-501c3s if there is demonstrable charitable intent.
The law requires that at least 5% of the foundation’s assets are given out every year; there is no ceiling, or any legal limitations, if a foundation chooses to give more, which many do.
*Note that donor-advised funds (DAF) are not legally required to distribute 5% of their assets every year; however, many DAF sponsoring institutions do have requirements around giving.
2) Mission-Aligned Investing
Frequently, funders conduct their charitable efforts through the grants that they give. Meanwhile, the remaining assets are invested across a broad spectrum.
In the past, the endowment was invested with the intention to maximize profitability. Recently, the field has more carefully looked at how endowments are invested. Does the investment portfolio align with the funder’s mission and goals to do good, or does the investment portfolio actually undermine the funder’s mission and goals?
There are numerous ways to align a funder’s investments with its mission, or conduct impact investing (as it’s commonly known). We discuss several below; however, if you’d like to learn more, we’d encourage you to check out Mission Investors Exchange.
a. Screening
According to the UN Principles for Responsible Investing, screening “is one of several widely used tools that investment managers or asset owners can use to implement a responsible investment policy across their investments.” Using technology, portfolio managers can screen out individual companies that don’t contribute and/or contribute negatively to a specific social outcome.
Socially Responsible Investing (SRI)
With socially responsible investing, a tool of screening, investors seek investments that are considered socially responsible because of the nature of the investee company’s business. Common themes of SRI include avoiding investments in companies that produce or sell products and services that could be considered harmful to the environment or society (alcohol, gaming, tobacco, oil) or seeking out companies engaged in environmental sustainability and other socially beneficial endeavors.
Environmental, Social, Governance (ESG) Investing
ESG investing is a way of screening and a type of SRI. Forbes explains that ESG investing relies on independent ratings that help you assess a company’s behavior and policies when it comes to environmental performance, social impact, and governance issues. Investment managers can use ESG ratings to determine whether a company and/or a mutual fund aligns with a foundation’s mission.
b. Mission-Related Investing (MRI)
Mission-related investments are made with the expectation of generating social or environmental benefits and risk-adjusted market-rate returns. MRIs are part of a foundation’s invested assets.
MRIs aim to achieve social and environmental impact while targeting risk-adjusted market-rate returns. They align the organization’s broader investable assets with its objectives by actively seeking investments that advance its social and environmental goals.
While MRIs can be made on a national level, they are often investments in or loans made to local organizations that provide social benefit.
c. Program-Related Investing** (PRI)
A program-related investment is a below-market-rate investment that a foundation can make that counts as part of its 5% annual payout.
While this investment can be counted as a grant, it is an investment tool. The IRS has specific criteria of these investments. PRIs can take many forms including loans, deposits, bonds, and equity investments.
**Program-related investments can be categorized under grantmaking; however, for the purposes of this post, we include it under mission-aligned investing.
Some funders are shifting or have shifted toward using aligning 100% of the assets with their mission.
3) Support Beyond the Check
In addition to traditional grantmaking and trying new ways of investing, foundations can also offer support in addition to/instead of monetary support i.e., “beyond the check” to their partners. This support can take many forms, some of which are included below.
a. Convening
Foundations can convene other funders, their grantee partners, and/or the community at-large (or a combination of those). These convenings can cover a wide range of topics – whether that’s providing opportunities for nonprofits to speak with funders, brainstorming sessions for funders to collaborate together to support their partners, gatherings with cross-sector partners to discuss specific issues, time together to share knowledge and ideas, and more. Convenings are important tools that foundations, as funders and peers of many different organizations, can organize and/or participate in to support their grantee partners.
b. Advocacy
Advocacy is another way for foundations to support nonprofits and the community. Although private foundations do incur a prohibitive tax on lobbying, foundations are able to participate in other forms of advocacy, including amplifying general messages about issues on communications platforms, educating legislators about a range of issues (without referencing a specific proposal), building relationships, convening nonprofits and decision-makers, and funding research aimed toward influencing certain opinions.
The Council on Foundations has a number of resources related to advocacy to help guide foundations on what they’re able to do.
c. Amplifying grantee voices in communications
Another way to support grantee partners is by amplifying their efforts and updates on a foundation’s social media platforms, website, blog, newsletter, etc. These efforts can range from sharing their updates, to publishing a foundation’s post featuring them, to highlighting them on a blog.
A blog post could either be an interview with a partner and written by a foundation staff member, or a guest blog post from the nonprofit (one of harp-weaver’s clients is offering an honorarium for its grantee partner organizations to submit a guest blog post about their organization).
d. Capacity building
Grantmakers for Effective Organizations defines capacity building as the tools and expertise that help nonprofits have effective leaders, good financial management, an ability to collaborate with others, and the space to plan, execute, and assess new strategies.
In many ways, capacity building is linked to the other services that foundations can provide to their partners. Foundations can offer capacity building grants, bring in outside experts to convenings focused on capacity building, or share information about capacity building in its communications.
This list is not an exhaustive list but provides a guide as to how foundations can support their grantee partners or other nonprofits in the community beyond grantmaking.
At harp-weaver, we are proud to have experience with implementing all of the tools and resources above. If you’d like to learn more about any of them or just want to understand what we do, please reach out to Abby at abby@harp-weaver.com.