How to use donor-advised funds to make impact investments

The UN Sustainable Development Goals – those 17 audacious targets for tackling the world’s thorniest problems like inequality, climate change, and poverty – face an equally audacious financing gap: $2.5 trillion annually.

Unlocking capital of this magnitude, according to World Bank President Jim Yong Kim, requires matching viable social innovations and projects with millions in risk capital, billions in development assistance, and trillions in national and global public and private investment. Unfortunately, some of the most promising market-based solutions that address the SDGs – for-profit companies, products, and projects – die on the vine before they have the chance to trigger this capital domino effect, due to a lack of properly-aligned sources of risk capital.

At the same time, donor-advised funds (DAFs) – a philanthropic vehicle managed by a wide variety of public charity sponsors that allows donors to retain advisory rights – have skyrocketed in popularity and currently hold over $85 billion in charitable assets waiting to be deployed. Savvy philanthropists have begun using DAFs to make not only traditional grants with no expectation of financial return and traditional investments with no expectation of social impact, but also impact investments that hold dual promise of advancing the charitable mission and providing financial return. Data on DAF granting and investing patterns is difficult to track, but based on our work in the field, research, and interviews with other experts, we understand that the number of donors who recommend impact investments – and the sponsors who facilitate such investments using DAFs – are few and far between. We believe there’s a vast missed opportunity to use DAFs for making impact investments in support of market-based solutions to the UN Sustainable Development Goals – across a wide variety of charitable purposes.

To describe this under-used mechanism available to donors, we draw from our own experiences in corporate venture investing at the Autodesk Foundation and facilitating investments as a philanthropic investment intermediary at PRIME Coalition, as well as from the experiences of our peers and partners in the field. While we focus specifically on the nuances of supporting early-stage innovation, we believe similar principles and suggested actions could be applied across asset classes, pending thoughtful action by donors and their sponsors alike.

Beyond providing the potential for financial return to the DAF, investment in early-stage innovation can align long-term interests of the entrepreneur and donor toward impact, help signal that the investee is or could be a viable and attractive investment, and unlock public or private investment from other sources. Through assertive partnership with their fund sponsors, we hope donors begin to thoughtfully mobilize the latent $85 billion in DAFs toward commercially viable companies and projects, which in turn will deploy products and services toward social and environmental impact at greater scale and speed than the nonprofit sector would otherwise.

Here are five things you can do starting today:

1. Understand donor-advised funds

Donor-advised funds are a unique philanthropic tool that allow donors to establish and fund a charitable account with a sponsoring organization that will be used later to support charitable activities. Donors receive an immediate tax deduction and maintain advisory privileges over both the fund’s investments and ultimate distribution for charitable purposes. In return, the sponsor gains control and authority over management of the funds.

There are over 1,000 DAF sponsoring organizations in the US, and they fall loosely into three categories – national charities that are often affiliated with financial institutions, community foundations, and issue-specific charities. Few sponsoring organizations focus on facilitating impact investments; Most only offer impact investing options opportunistically, and in response to assertive demands from their DAF clients.
The mutual involvement in making and executing recommended actions among the donor and sponsor requires that both parties understand the legal rules, definitions, mechanics, and considerations associated with investing DAFs for impact.

Read the full story at Stanford Social Innovation Review. 
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