Tools & Resources

Impact Investing by Foundations: Key Terms in Philanthropy

Impact investing is a broad field including many investor types, movement builders, researchers, and more. Foundations and other philanthropic asset owners are a key subset of this community, engaging in impact investing with a unique set of skills and approaches. This article features terms and definitions specifically related to impact investing among foundations. For a review of concepts in the overall impact investing field, please visit here. If you have any questions or thoughts, please reach out to us!
 

Top Tips  

  • Bookmark the MIE Glossary. If we’re missing a term, let us know.
  • There is no one size fits all approach:  Certain terms describe the ways in which foundations manage their assets, while others are terms of art classified by law. However, not all foundations use these terms in the same ways to publicly describe their own practices. If you're just getting started in impact investing, the terms may nontheless help you reflect on the possibilities for your organization.
  • Note terms with legal implications and consult with your legal team: We recommend you visit the IRS website and speak with your legal counsel to understand the nuances in legally specified definitions and how they can be applied to your unique organizational context.
 
 

What is a Program Related Investment (PRI)?

An IRS term of art specifically for foundations that refers to foundation investments made with the primary purpose of accomplishing mission, not the generation of income.  
 
PRIs in the United States can legally be counted toward a private foundation’s annual distribution requirement (a 5% minimum). Although PRIs can in fact be market-rate investments, the requirement to prove charitability and foundation commitments to mission have historically resulted in PRIs being used to provide loans, equity, or other types of investments that are below market rate or offer more flexible terms. The role of this type of non-traditional capital cannot be understated in the investment marketplace: for example, PRIs can play a unique role in collaborative investments and/or take on risks that make it possible for traditional investors to participate in ways that may not have otherwise been possible. (Click here for an article by Debra Schwartz of MacArthur Foundation on the power of this type of catalytic capital.)
 
Although PRIs can legally be counted towards the 5% minimum distribution, some foundations actually provide PRIs above and beyond that distribution. For example, some foundations make PRIs from their endowments, preserving their required distribution for grants. Others distribute more than 5% for charitable purposes. Watch this video for an explanation of PRIs from Ford Foundation and learn more on the IRS website. Click here and here for resources from Adler Colvin on private foundations. We recommend you speak to legal counsel to learn more.
 

What is a Mission Related Investment (MRI)?

A foundation-specific term referring typically to risk-adjusted, market-rate impact investments made from the foundation's endowment or corpus.
 
MRIs are not an official IRS designation, and foundations are not required to consider their mission or social impact in their endowment-related investment decisions. However, foundations are increasingly asking how they can put more of their assets in service of mission. Click on this video for an explanation of MRIs from Ford Foundation. It's important to note that many foundations also distribute more than 5% annually by choice — either as grants or PRIs. Still others make below-market investments from their endowments. Meanwhile, spend-down foundations set a course to put all their assets in service to mission over a period of time.
 
These are just some of the ways in which the distinction between MRIs and PRIs may be more subtle as you look deeper into foundation practice. We recommend you speak to legal counsel to learn more about your options.
 

What is a Community Development Financial Institution (CDFI)

A private, mission-driven financial institution —often designated nonprofit 501(c)(3)— dedicated to delivering responsible, affordable lending for underserved people and communities.
 
CDFIs include community development funds, credit unions, banks, and more. As experts in impact investing to support community projects, CDFIs often come up in dialogue in foundation impact investing activities. Foundations sometimes provide investments to CDFIs and other intermediaries rather than directly lending to community organizations, particularly when they’re first getting started. We recommend visiting the Opportunity Finance Network (OFN) website to learn more. Wondering if there's a CDFI near you? See OFN's CDFI locator map.
 

How Do Foundations Act as Impact Investors?

Today, many foundations are thinking beyond traditional grant-making to align more of their assets with mission in creative ways. Foundations have a wide range of approaches to risk, return, impact, and liquidity needs. Some seek market-rate returns alongside social and environmental impact, while others prioritize impact and provide more flexible, risk-tolerant, and patient capital. These foundations use their capital to de-risk individual investments or markets and attract other types of investors—including those from the private sector and government—who can bring much greater resources to bear.
 

How Does Impact Investing Among Foundations Make a Difference?

Impact investors play a critical role in ensuring that people and planet are central to investment decisions. However, foundations have played a key role to-date in ensuring that the "impact" is not lost as the impact investing movement grows. By providing catalytic, patient capital, they also play a unique role in paving the way for other investors seeking market-rate returns or lower risk. Every day, impact investments are helping to cure disease, provide affordable homes for hardworking families, educate children, build renewable energy infrastructure, and more. Here are a few examples from Mission Investors Exchange’s members:
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