SRI Investing By Private Foundations Just Got Easier

SRI Investing By Private Foundations Just Got Easier

September 2016


The federal government recently made it simpler for foundations to avoid the onerous “jeopardizing investment” rules when making socially responsible investments (SRI). With over $798 billion in assets held by 87,000 foundations (Foundation Center, 2013), this is good news not only for foundations, but for the SRI investing community, charities and the public who reap the rewards from a stronger and healthier society.

Melinda Gates (C), wife of Bill Gates and co-founder of the Bill & Melinda Gates Foundation, visits a booth at the 4th Women Deliver Conference in Copenhagen on May 17, 2016. Melinda Gates announced that the Bill & Melinda Gates Foundation donates $ 80 million to the work of collecting data on the world’s women, during her visit to the world’s largest global conference on the health, rights, and wellbeing of girls and women. (Photo credit: LISELOTTE SABROE/AFP/Getty Images)

The so-called jeopardizing investment rules, which apply only to private foundations and not public charities, have long hampered foundations’ ability to make investments directly related to their charitable missions, like loans or loan guarantees that enhance charitable goals but provide no (or very little) financial returns. Under the jeopardizing investment rules, if a foundation makes a potentially risky investment, it may violate the rules, and a special excise tax may be imposed on both the foundation and participating foundation managers.

The new regulations – issued by the U.S. Treasury Department on April 25, 2016 – include nine new examples (in addition to the 10 examples in the existing regulations) of how “program-related investments” (PRIs) can be used to advance a foundation’s charitable objectives, providing more clarity as to what can and can’t be done. These additional examples show that a foundation may invest in a variety of ways, including loans, equity investments and credit enhancement arrangements, and may invest in individuals, other charities and even for-profit companies in the United States and abroad, regardless of actual investment returns, as long as the true purpose of each investment is to do good, and not to make money.

The fact that many types of investments can qualify as PRIs is great news. However, the new regulations do not fully resolve the tension between charitable purposes and financial returns. For example, in the introduction to the new rules it is suggested that setting a predetermined exit from a PRI as soon as it becomes profitable can be an important indication that the investment was really about doing good, not about making money. What if the foundation wants both?

The Middle Ground

Must a foundation truly choose between traditional prudent investment principles (balancing investment returns, risk, diversification and liquidity) and its mission when making investment decisions?

Late last year, the IRS addressed (for the first time ever) this middle ground (often called “mission-related investing”) between traditional prudent investing and PRIs. The IRS said that foundation managers may consider whether an investment furthers the organization’s charitable purposes when deciding whether a particular investment strategy prudently provides for the foundation’s long-term and short-term mission-related financial needs. In other words, a mission-related investment may, without falling afoul of the jeopardizing investment tax, afford some flexibility in terms of risk, returns and liquidity than might otherwise be considered “prudent” under traditional investment principles.

This should provide some comfort to foundations involved in SRI investments that do not qualify as PRIs. It is particularly useful not only when investing in socially responsible companies or funds, but also for foundations that pursue more aggressive forms of impact investing, such as social impact bonds, as part of a broader investment portfolio.

While this is an excellent start, there are still not enough examples or “safe harbors” to fully guide foundations on what is allowed and what isn’t. There is also no regulatory guidance for SRI investments that are not PRIs, so foundations must continue to carefully evaluate their risks. For foundations that want to make SRI investments a large part of their total portfolio, it may make sense to approach the IRS for a private letter ruling or a pre-submission conference to confirm that the proposed program will not violate the jeopardizing investment rules.

The new regulations are not perfect, but they send an important message to private foundations that charitable focus and financial gain are not mutually exclusive. Lessening the restrictions on “double bottom line” investing benefits everyone – foundations, charities and the public at large who benefit from the expansion of philanthropic activities in smart and creative ways.


This article was written by Todd Millay from Forbes and was legally licensed through the NewsCred publisher network.

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