Several Innovators Are Tapping $142 Billion in Charitable Assets for Impact
Building a regenerative food and agriculture system is going to require at least $700B of capital (Electris, et al. Soil Wealth, Investing in Regenerative Agriculture across Asset Classes, 2021). over the next 30 years. To date, only an estimated $47.5B has been invested (around 7% of what’s needed). Where can the additional needed capital come from? This gap has investors and fund managers considering a funding source currently underutilized for impact: donor-advised funds, or DAFs.
What is a DAF? It is a tax-preferred philanthropic vehicle administered (or “sponsored”) by a spectrum of for-profit and nonprofit financial institutions, including groups like Fidelity, a multinational financial services firm, and ImpactAssets, an administrator of DAFs specifically for impact.
Organizations, families or individuals can establish a DAF with an initial tax-deductible contribution into the DAF, which is considered a charity that holds assets. The charitable contribution is invested in a variety of assets while the donor recommends grants to qualified nonprofit organizations over time.
The Pros and Cons of Donor Advised Funds’ Structure and Potential
The first DAF was established in 1931 by the New York Community Trust, and in 1991, Fidelity Investments became the first DAF sponsor. According to the National Philanthropic Trust’s 2020 DAF Report, DAFs are the fastest-growing vehicle in philanthropy. In 2019, the report estimates that DAFs hold approximately $142B in assets.
Why is this the case? Philanthropists are seeing DAFs as more appealing places to donate from as opposed to traditional foundations for several reasons. The cap on deductible donations for a DAF is higher than for a private foundation, there are no set up fees, and there are no annual accounting or tax filing requirements. Additionally, DAFs do not have a required disbursement rates, whereas foundations require a 5% spend down annually to maintain tax status.
These benefits can have negative consequences and incentivize DAF owners to hold onto tax-advantaged capital, invest it in ways that simply perpetuate the status quo, and even actively take advantage of the original intent. Furthermore, in some cases, financial advisors and corporate fund managers may be incentivized to keep the DAF assets under management to reap the management fees.
One of the upsides of the flexibility of DAFs is that the capital can be invested in a wide variety of instruments, including investments that align with philanthropic goals while it is waiting to be deployed. Moreover, the capital that ultimately gets donated can also be deployed not only as one-time grants, but also through mechanisms like low interest loans (principal and interest can simply get recycled back into the DAF for future use).
Making impact investments from DAFs is still in its infancy (currently only around 3%, or about $4B, of assets are invested with an eye toward impact). There are some technical issues that can arise around, for instance, the classification of the various investments. However, despite being early days, there is an opportunity to use DAFs to make impact investments to advance a wide range of charitable purposes, and many DAF administrators are starting to help facilitate this process. Some strong examples already exist, such as the East Bay Community Foundation, RSF Social Finance, and ImpactAssets (which we feature here as one example).
ImpactAssets is a nonprofit financial services firm dedicated to increasing the flow of capital to impact investing, and one of the ways they pursue this goal is through the management of the ImpactAssets’ Donor Advised Fund. With $1.6B in AUM, this DAF is dedicated to impact investing. After funding an account, clients can source their own impact investments or access a dynamic platform of impact investment options that have been diligenced by ImpactAssets to maximize charitable assets while supporting private, mission-driven companies and funds.
“We offer high impact investment opportunities delivering fully market-rate financial returns, as well as concessionary options, and because of our scale we’re often able to access investments that may be difficult for our clients to access on their own,” says Nick Peters, Director of Investments at the firm.
Deploying DAFs for Impact in Regenerative Food and Agriculture
The flexible nature of DAFs means more capital can get channeled into building a more regenerative food system. Because investors have more options for the grants and investments can be made from within the DAF, they can use different capital types to work towards a variety of different outcomes, including improving human health and reducing inequity.
Capital from DAFs can be ideal in cases where time horizons are longer, there is opportunity for outsized impact but not necessarily outsized return, or the return profile simply isn’t likely going to generate a market rate return. DAFs have already been used in the impact investing space. This SSIR article provides some background on the use of DAFs to fund early stage entrepreneurs broadly aligned with the Sustainable Development Goals (SDGs).
“DAFs are an underutilized source of investment capital for high-impact sectors, like regenerative food and ag. DAFs can be the perfect sandbox for jumpstarting entrepreneurs and can play a catalytic role alongside other types of philanthropic capital, particularly in sectors that require a lot of time and/or money to demonstrate product or market fit and track record,” says Peters of ImpactAssets.
There are already a number of players deploying capital in the food and agriculture space. John Roulac, founder of Nutiva, Executive Producer of Kiss the Ground, and angel investor, has been a leader in deploying capital into the space through his DAF. John has made a variety of investments to-date, including a regenerative baby food company called White Leaf Provisions, a regenerative meat platform called Cook’s Venture, a carbon auditing and rating service called Earthbanc, and a farmland transition fund called RePlant Capital.
John sees his DAF as a means to donate to or invest in good causes, with beneficial tax incentives. “I believe to address the climate crisis and looming supply chain disruptions we will need billions of dollars to be invested in regenerative ag. Yet return expectations need to be addressed. For example, expecting a 15% ROI is not viable if we are to regenerate the earth,” says Roulac. “My DAF enables me to quickly deploy capital in a variety of different ways to support opportunities that may or may not have traditional return profiles.”
“It’s an exciting time to be investing in regenerative food and ag,” says Peters of ImpactAssets. There are increasingly new opportunities offering incredible financial and impact upside, and at the same time, some of the more established players are getting to scale and developing the track record needed to attract institutional capital. However, because of this growth and breadth, it’s important for DAF managers to be clear about investors’ investment profile.
“Because we have such a broad client base and a range of impact investment products on our platform, we find that it’s critical to level-set around expectations for investment characteristics like liquidity, financial return profile, and the types of risk we’re comfortable taking – DAF investments are not one-size-fits-all,” Peters says.
If you have a DAF, or are considering starting one, there are a variety of ways to invest in our food systems. Together, we can leverage the capital already within DAFs to work towards the $700B goal by 2030 — reach out to us at Provenance Capital Group ([email protected]) to learn more about how we at PCG are tackling and navigating this opportunity to put DAF funds to use in transitioning our food sector to one that benefits people and planet.
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