Impact Voices | October 4, 2021

Power shifting boosts the potential of impact investments: charitable reform policies could help

Laura Tomasko
Guest Author

Laura Tomasko

Maximizing the transformative possibilities of impact investments requires shifting power from individuals and institutions toward communities that have historically been kept at the margins. In the absence of such a power shift, well-intentioned investors have delivered status quo formulas for helping those without power – with mixed results.

We are witnessing changes in attitudes about power and wealth inequality from multiple directions. In philanthropy, decades of advocacy to shift power from grantmakers toward the communities they serve is yielding new practices, including increased commitments to general operating support, multiyear grants, and participatory processes. 

The dynamics of power shifting is also pushing – and will increasingly push – impact investing, a large and diverse field comprising individual and institutional investors seeking social and environmental impact with financial returns to boot. The reasoning goes that if impact investors are to truly address systemic issues, like structural racism, and disrupt the status quo, they should start by shifting power

In this emerging era of rethinking power and impact investments, how might new ideas in charitable giving reform help accelerate the engine of power shifting and social and economic transformation? The current debate among charitable giving advocates about whether the proposed Accelerating Charitable Efforts (ACE) Act would get more charitable dollars to communities offers an opportunity to think about how impact investments fit within the landscape of charitable endowments and giving reforms. Unlocking impact capital can be a first step towards shifting power. 

Integrating impact

The primary focus of the ACE Act is to speed up distributions from donor-advised funds, or DAFs – funds in which donors take an immediate tax deduction and later decide to recommend distributions to charities. Increasingly, DAF sponsor organizations are offering DAF-holders opportunities to make impact investments, which, like grants and donations, can serve as another tool to reduce the racial wealth gap, build community wealth, and shift power in communities. In its current form, the ACE act does not address how impact investments would be treated in the new types of proposed DAFs. Recent surges of philanthropic reform tended to focus on incentives to increase grantmaking and relegated impact investing to the margins. If advocates view impact investing as a tool to maintain the status quo, they might not see benefits to incentivizing impact investing as they do grants and donations. 

Like foundation impact investments, DAF impact investments can resemble private foundation program-related investments (PRIs) or mission-related investments. PRIs are counted towards the payout requirement for private foundations. Since DAFs do not currently have a payout requirement, there is no guidance on how a PRI-like DAF investment would be treated currently or under proposed reform efforts, leaving a blind spot for decision makers who might otherwise be committed to using the DAF vehicle for impact investing.

More fundamentally, the ACE Act does not clarify how these impact investments would be treated – are they to be considered charitable in nature, like PRIs, and qualify as part of the aligned benefit rule for 50-year DAFs or payout proposals? Or are they to be treated like investments and not considered as working towards the charitable mission and intent of the foundation or donor?

Advancing racial equity

If the ACE Act moves forward, additional text in the bill could clarify how to treat impact investments. Alternatively, the U.S. Treasury Department could address the blind spot by issuing a regulation or guidance to help DAF sponsor organizations understand how to treat their impact investments. President Biden’s Executive Order on advancing racial equity, signed on his first day in office, opens a new window for federal agencies to incentivize impact investments aimed at racial equity and economic transformation. Impact investing field leaders can educate officials in Treasury and the White House about how impact investing can play a role. They can also challenge the resistance among the charitable giving reform community to consider impact investments as they do grants and donations. 

Supporting the charitable sector, which includes impact investors and community-based recipients of impact investments, should be part of a collaborative public-private agenda to advance racial equity. Building community wealth and adopting power shifting practices in grantmaking and impact investing is one way to work towards this goal.

Of course, advancing policies to increase capital for impact investments is only one step, and it does not guarantee these resources will build community wealth or shift power. Funders and impact investors can help advance racial equity by investing in – and working as coequal partners with – organizations led by people of color and other marginalized communities who can give voice to their own needs. 

At the end of the day, impact investors and their well-served communities will both benefit from system change. “If you have come here to help me, you are wasting your time,” indigenous activist and educator Lilla Watson once said. “But if you have come because your liberation is bound up with mine, then let us work together.”

Laura Tomasko is a policy program manager in the Center on Nonprofits and Philanthropy at the Urban Institute