Impact Investing: Making a Difference While Making a Return
Rachel McIntosh, Vice President in the PNC Community Development division
In our client conversations, we not only talk about anticipated returns on an investment, but also discuss how to help deliver returns for a cause. Increasingly our partners come to us asking “how can we make a difference?”
Impact investing has shaped the way today’s funders look for effective opportunities. Beyond traditional grantmaking, more funders cite social responsibility and investing as core interests. Advances in technology have also given mass audiences a variety of digital platforms for the mass audience to be heard.
Increasingly, businesses are finding that by casting a wider net to retain more cause-related strategies, they can increase community engagement, stimulate interest from new partners, and even attract and retain talent.
Social media has influenced the way companies look at their giving strategies. As bankers, we too have witnessed this viral influence, as our philanthropy efforts move beyond just writing a check.
Impact is the New Giving
Impact investing is an umbrella term that encompasses any financial investment made with an intent to advance a social good while also recovering principal and anticipating a financial return. It can be underwritten by an individual, government entity, foundation or corporation - it does not discriminate.
However foundations are at a slight advantage. Giving to create impact allows a foundation to use the philanthropic resources in their financial toolbox to meet mission, scale-desired community outcomes, while simultaneously complementing grantmaking and portfolio management.
Two types of impact investing work well for the philanthropic sector: program-related investing and mission-related investing. Each can weave in the bottom line which includes a social, environmental and economic component:
- Program-related investing (PRIs) are investments at or below market rate that satisfy a foundation’s 501(c)(3) chartered programmatic goals but also include a return in capital. PRIs frequently involve loans or lines of credit. For example, our partners at the Vectren Foundation recently committed a line of credit guarantee that needed to bridge the lag time in disbursements on a large federal contract. This greatly assisted the Indiana organization with cash flow and non-disruption of service delivery.
- Mission-related investing (MRIs) encompass investments at or above market rate that contribute to achieving mission. Mission-related investments are primarily sourced from the foundation’s endowed asset portfolio. To qualify towards payout requirements, these investments similarly must meet a charitable test and be documented accordingly. A suggested approach is to first sift through asset portfolio investments by social and environmental priorities of the foundation. This can be done without compromise to achieve the desired returns.
Other examples of MRI interaction may begin with one-off transactions such as buying a fixed income bond for a public-serving project that advances the outcomes of the foundation while also delivering a return to the asset portfolio. Likewise, private equity placements can be made directly into local equity pools that promote job development to fuel small businesses, while reaping financial return for the foundation.
With the help of GIFT, this initial blog post, offers baseline definitions to assist Indiana foundations with a reference point. It is the beginning of a blog series sponsored by the Indiana Philanthropy Alliance to boost understanding in how to engage foundations in approaching grantmaking budgets and/or portfolio management with an impact investing lens. More information about IPA resources available www.inphilanthropy.org.
Rachel McIntosh is vice president of PNC Community Development Banking for Indiana. In this role, Rachel identifies community loan funds across Indiana available to foundations and/or other opportunities for prioritizing investments through impact investing. For more information, contact Rachel at Rachel.mcintosh@pnc.com.