Mission-related investing. Socially responsible investing. Program-related investments. In the world of private foundations, emerging trends in investing and flexible distribution vehicles may cause your head to spin.
This is the first installment in a series of articles in which we’ll cover how you can leverage these trends for your private foundation and philanthropic needs. In this first installment, we’ll cover key definitions and lay a basic foundation. In those to follow, we’ll explore these concepts in greater detail and show how you can stretch your private foundation’s charitable dollar a little further.
Mission-related investing (MRI) is the overarching term used to describe certain types of investments made by philanthropic organizations. The two subcategories of MRI are market-rate and below-market-rate investments.
Market-rate simply means the investment is expected to have returns on par with markets in general. Market-rate MRI is a financial investment and should meet applicable prudent investor standards. It may include sustainable and socially responsible investing. Below-market-rate MRI is also referred to as program-related investing (PRI). This is an IRS term and, strictly speaking, only private foundations can make PRIs, although community foundations and other public charities may make below-market-rate investments. These investments aren’t required to have market-rate returns as long as the investment itself furthers the foundation’s mission.
Under these two overarching subcategories—market-rate and below-market-rate investments—there are several different types of investments. Let’s take a closer look at examples of each kind.
Sustainable and Socially Responsible Investing
Sustainable and socially responsible investing are two types of market-rate MRI. These types of investment screens can be made by individuals as well as by private foundations and public charities and include a broad range of investment approaches.
Sustainable investing involves either excluding or underweighting companies based on their environmental practices and impact. It may also include overweighting those companies with positive sustainability ratings. For example, a mutual fund manager may focus on companies that use product designs that reduce negative environmental impact or exclude companies that emit harmful toxins and pollutants as part of their manufacturing process.
Socially responsible funds generally screen out companies that are associated with undesirable practices, such as child labor, or entire product categories, such as gambling, tobacco and alcohol, and certain pharmaceuticals.
PRI is an example of below-market-rate investing. PRI is an IRS term that refers to investments made by a foundation that are related to the foundation’s exempt purposes and therefore are not taxable as unrelated business taxable income. They can also count toward the 5 percent payout that foundations are required to make each year. The IRS Web site describes PRIs as investments for which all of the following are true:
- The primary purpose is to accomplish one or more of the foundation's exempt purposes
- The production of income or appreciation of property isn’t a significant purpose
- Influencing legislation or taking part in political campaigns on behalf of candidates isn’t a purpose
In judging whether the production of income or appreciation is a significant purpose, it helps to ask the question: “Is this an investment that someone interested strictly in income or appreciation would invest in?” If it is, then it may not constitute a program-related investment. To fit the bill, it must be related to the foundation’s exempt activities and be an investment that wouldn’t have been made otherwise.
These investments may occur across all asset classes, taking the form of loans, loan guarantees, cash deposits, and equity investments. The IRS also lists some examples of PRIs:
- Low-interest or interest-free loans to needy students
- High-risk investments in not-for-profit, low-income housing projects
- Low-interest loans to small businesses owned by members of economically disadvantaged groups where commercial funds at reasonable interest rates aren’t readily available
- Investments in businesses in deteriorated urban areas under a plan to improve the economy of the area by providing employment or training for unemployed residents
- Investments in not-for-profit organizations combating community deterioration
These investments can be considered part of your private foundation’s grant budget, or they can be considered part of the endowment investment allocation.
In context of the work your private foundation does to fund and support philanthropic endeavors in our communities, these vehicles are a way to bring flexibility to that support, extending it to types of investments as well as types of grants.
Stay tuned for our next article, where we’ll take a deeper dive into socially responsible and sustainable investing, PRI, and how your foundation can leverage them to further its mission. In the meantime, contact your Moss Adams professional for further information on your private foundation’s investment options.