FA Magazine June 2023 | Page 30

Rather than focus on what you don ’ t want companies to do , ESG screening selects companies based on the positive things they ’ re doing .

The real difference between traditional banks and community banks is what they do with the money on deposit . Rather than lend it to large corporations outside the local vicinity , community banks invest it locally through loans for affordable housing projects , home mortgages in low-income areas and new businesses .

Community investing can be a relatively low-risk cash management strategy , an easy way for a foundation or philanthropic individual to put more financial assets in the service of a charitable mission . To look for a CDFI in a specific community , go to www . cdfifund . gov for a listing of these institutions by city and state .

2 . Socially Responsible Investing : ESG Screening

The concept of socially responsible investing ( SRI ) has been around for more than 30 years . It began with a simple idea : Don ’ t hold the stock of companies that actively work against your values . So environmental grant-makers might screen “ big oil ” out of their portfolios and health grant-makers might avoid “ big tobacco .” Such tools to filter investments have been dubbed “ negative screens ” because they focus on what investors don ’ t want in their portfolios , like companies with interests in gambling or child labor .

In recent years , however , investors and their advisors have taken a new approach to SRI , one that involves “ positive screens ” that actively seek companies demonstrating the kind of corporate social responsibility that philanthropic investors would like to encourage . The primary positive screens are based on environmental , social and governance ( ESG ) practices , collectively known as “ ESG screening .” So rather than focus on what you don ’ t want companies to do , ESG screening selects companies based on the positive things they ’ re doing .

Historically , there was a view that investing with an SRI or ESG lens meant getting concessionary returns in order to achieve both a financial gain and a social benefit , but many impact investments deliver risk-adjusted market rates of return across asset classes . Done well , investing in ESG-screened companies and funds can be a natural part of an investment strategy that carries no more risk than traditional investing in the stock market .

3 . Program-Related Investing : Banking To Grantees

When we think about supporting a charitable cause , most of us think in terms of gifts — money given away with no expectation of it ever coming back . Private foundations offer a unique tool kit that helps philanthropists pursue their missions in a variety of ways . For instance , foundations can make loans , provide loan guarantees , and make equity investments in support of their mission . Such loans are defined by the IRS as program-related investments ( PRIs ) and are an increasingly common tool among private foundations .

These investments come out of the foundation ’ s grant-making purse and thus satisfy the foundation ’ s 5 % minimum distribution requirement . However , while grant dollars go out the door never to return , program-related investment dollars are treated as assets on the foundation ’ s balance sheet and the investments are generally recovered in part or in whole . In some cases , a PRI may even generate a return for the foundation in the form of interest or appreciation . Importantly , the primary objective of a program-related investment must be to significantly further the foundation ’ s charitable mission , and securing a financial return must not be a significant driver for making such an investment . Because PRIs fulfill a charitable purpose , they are not subject to the jeopardizing investment and prudent investor rules applicable to traditional investments .

Foundations use PRIs creatively in myriad ways . Most first experiment with them in the form of a loan to an organization they already know well , oftentimes a prior grantee . For example , a foundation may offer a community church a very low-interest unsecured loan to finance the construction of a new facility . Or it may provide a no-interest line of credit to a favorite art museum to help smooth out the bumpy financial times between blockbuster exhibits . A foundation may even guarantee a loan that allows a housing agency to gain access to funding from a commercial bank , which , as long as there isn ’ t a default , doesn ’ t require the foundation to put a dime out the door .

4 . Mission-Related Investing : Graduating To The Big Leagues

Traditionally , philanthropists give money away and investors make money . The former want to create change and the latter want to pocket it . You ’ d think that the two goals would be incompatible , but a new hybrid of philanthropy and private equity investing blurs the lines , allowing foundations to do well by doing good .

It ’ s called mission-related investing , and in this approach , foundations use their endowment funds to invest in profit-seeking solutions aligned with their mission .

The approach is similar to the one

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28 | FINANCIAL ADVISOR MAGAZINE | JUNE 2023 WWW . FA-MAG . COM