How Donor-Advised Funds Can Lead the Way for Responsible and Impact Investing

In the philanthropic world, charitable foundations are coming under increased scrutiny and pressure to ensure that their endowments are invested responsibly and for positive impact. This requires them to move away from investments that harm natural resources or exacerbate social inequality. As an example, many foundations hold fossil fuel investments while at the same time making grants to combat climate change.

The spectacular growth of donor-advised funds (DAFs) has brought similar attention to how DAF assets are invested. In 2018, philanthropic assets held in donor-advised funds (DAFs) globally surpassed the $100 billion mark for the first time (NPT DAF Report 2018). The rise in DAFs highlights how this giving vehicle is growing in popularity across all donors, especially those with significant wealth.

A DAF is a philanthropic fund established under an umbrella charity that administers the fund on behalf of the donor. For many, it is an efficient alternative to setting up a private foundation or charitable trust. A DAF allows donors to make charitable donations, receive immediate tax benefits, invest DAF assets tax free, and recommend grants from the fund over time. Just as foundations should invest their endowments responsibly, DAF providers should also take steps to offer alternative investment options that promote positive impact.

There is growing interest from investors to better align their resources, including their philanthropic resources, with their values. Several investment strategies are now available to accomplish this goal. For instance, investment funds focused on Environmental, Social or Governance (ESG) criteria screen out companies with potential negative impacts and actively seek companies that promote sustainability. Some ESG investments target particular social and environmental themes (Sustainable Development Goals, climate change mitigation, gender equality, etc.). So-called “impact first” investments take this commitment a step further by prioritising social and environmental considerations over financial returns.

In fact, the DAF account holder’s charitable mindset makes ESG and impact investing opportunities especially promising. With charitable investments, donors may place as much or more importance on impact return as they do on financial return.

NPT UK is leading the way in helping donors make greater use of DAFs for responsible and impact investing purposes. As a DAF provider, NPT UK is committed to:

Increasing the number of pre-vetted impact investment options across different asset classes for our DAF clients (beyond investments that simply “screen out” irresponsible companies or sectors)

Including investment managers/platforms that are committed to increasing their responsible and impact investment portfolios

Giving DAF clients with larger accounts the option to recommend responsible/impact investment options beyond standard offerings on the NPT UK investment platform – including recommending additional managers

Offering more donors high-impact investment opportunities (for example, grouping investments for a specific cause such as housing for vulnerable people)

NPT UK’s vision is to offer responsible and impact investment options across this entire spectrum to all of our DAF clients, no matter the size of their DAF. We currently offer a range of sustainable and impact-themed ETFs as well as bespoke options for higher value DAFs. While we acknowledge that it will take time to fully realise this vision, we are excited about the possibility of taking a leadership role in this inspiring new investment landscape, and ultimately, providing better service to our donors.