Creative Philanthropy – Nonprofit Law Blog

The American Bar Association 2023 Business Law Section Spring Meeting featured a session on Creative Philanthropy: Impact (ESG) Investing, Donor Advised Funds, Program Related Investments and More moderated by JJ Harwayne Leitner and presented by Jinna Kwak (Adler & Colvin) and Matt Topham (Gates Foundation). Here are some highlights and links to additional resources:

Impact investing – A Definition

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending on investors’ strategic goals. 

– Global Impact Investing Network

Continuum of Impact Investments

  • Social responsible or ESG investing
  • Mission related investment (MRI) – made with intention to further or align the investor’s mission and recover the invested principal or earn a financial return
  • Program-related investment (PRI) – Section 4944 of the Internal Revenue Code

See Across the Returns Continuum (Omidyar Network):

The proportion of money that philanthropic institutions allocate to impact investing remains remarkably small. In 2013, less than 2 percent of the $55 billion deployed by foundations went into investments rather than grants, and an even smaller portion of that sum—less than one half of 1 percent—went into equity-based investments.9 But a shift is underway within philanthropy. Institutions such as the Ford, Gates, Heron, MacArthur, and McKnight foundations are using the full array of tools at their disposal— from program-related investments that come out of their grantmaking funds to commercial investments that draw from their endowments. We hope that other foundations will follow suit.

Program-Related Investments

PRIs are investments which meet the following three requirements:

  1. The primary purpose is to accomplish one or more of the foundation’s 501(c)(3) exempt purposes,
  2. Production of income or appreciation of property is not a significant purpose, and
  3. Influencing legislation or taking part in political campaigns on behalf of candidates is not a purpose.

Topham: 2nd prong gives foundations the biggest concern. According to the regulations, in determining whether a significant purpose of an investment is the production of income or the appreciation of property, it is relevant whether investors who engage in investments only for profit would be likely to make the investment on the same terms as the private foundation. Some foundations think it might suggest that the foundation would need to invest in ‘lousy’ companies or pay more for shares than other investors, neither of which may be consistent with what it wants to do. Foundations should have a clear record for what the charitable purpose of the investment is.

Important Distinctions Between PRIs and MRIs

  • PRIs are exceptions to jeopardizing investments
  • PRIs are treated as qualifying distributions for minimum payout purposes
  • PRIs are exempt from excess business holding rules
  • PRIs mostly don’t have unrelated business income tax issues
  • PRIs should not be treated as taxable expenditures

PRIs that are not to exempt public charities are subject to expenditure responsibility.

Typical PRI Structures

  • Equity PRI (Simple Agreements for Future Equity (SAFEs) are also being used increasingly as PRIs)
  • Debt PRI


  • Recoverable grants
  • Convertible grants – starts as a grant, converts to a PRI
  • Warrants (generally, a long-term option to buy a given stock at a fixed price) – useful as an add-on to debt structures (for Gates, not as lead investor)
  • Guarantee doesn’t count as a payout unless actually paid

Negotiating Charitability

  • Define the charitable purpose clearly
  • Ensure appropriate due diligence
  • Educate the PRI recipient (and strongly encourage the PRI recipient to get counsel with relevant experience)
  • Promote alignment with existing shareholders and co-investors (upfront work necessary, including understanding of PRI limitations and protection of charitable assets)
  • Include key contractual provisions (see, e.g., Gates Foundation – Vir Biotech agreement)

Due diligence

  • Direct Equity PRIs
    • programmatic/operational diligence
    • financial diligence
    • legal diligence
  • Indirect Equity PRIs (in addition to the above)
    • fund manager – track record with similar investments
    • co-investors – relevant experience

Navigating Defaults

  • Charitability default – remedies for breach, which should have very clear triggering events (e.g., repayment, nonexclusive license back to foundation (see, e.g., Gates Foundation PRI Triggered Global Health License)
  • Inability to achieve the charitable purpose – cure periods for foot faults, modification of terms (but be careful of whether investment is still PRI)

Mission Related Investments

  • Mission-aligned investments that don’t meet the requirements of a PRI
  • Must be a prudent investment both under tax requirements and state law (e.g., UPMIFA)
  • Generally expect MRI to have a higher financial return than a PRI
  • MRIs may be subject to UBIT (is it substantially related?)
  • See Notice 2015-62; Private Foundation: New Rules Recognizing Mission-Related Investments
  • Topham: Foundations don’t make so many MRIs because PRIs have more benefits to the foundation (see Important Distinctions list above) and because foundations don’t want to open the door for flood of requests from investors who would generally prefer MRIs; MRIs are made when foundations aren’t getting tax/legal support that the investment will fit as a PRI (Gates Foundation has the luxury of getting a strong tax opinion for each PRI)

General MRI Tips

Public Charities and PRIs (Quasi-PRIs)

  • Defined in Form 990 Instructions (program-related investments other than recoverable grants)
  • PF rules generally do not apply (but DAFs and SOs have their own rules)
  • If the investment has a substantial causal relationship to the accomplishment of the charity’s exempt purposes, then no UBIT

Impact Investing Through Donor Advised Funds

  • DAFs may provide source of funds for PRIs and MRIs (no existing definition of PRIs for DAFs)
  • Distinguish between distribution (requiring expenditure responsibility) or Investment (requiring compliance with prudent investor rules)
  • Must be careful of compliance with DAF rules
  • One strategy – using 501(c)(3) public charity intermediaries loan funds

Strategies for Assessing Impact

  • Establish Measurable Charitable Objectives
    • best solved with input from company
    • what data is current captured?
    • are there good proxies for data that is otherwise difficult to obtain?
  • Monitor Compliance
    • board observer rights (appointing a foundation employee to a board seat may create problematic conflicts of interest, but appointing an independent director may be a good tool)
    • reporting/recordkeeping
  • Business Continuity/Sustainability
    • Successful achievement of charitable objectives depends on company continuing to operate
    • Consider making follow-up investments (e.g., bridge loans, but not bridges to nowhere)