YPTC brought together a panel of experts to discuss the growing trend for foundation executives and finance professionals—impact investing.  

We heard from Jim McCormick, one of YPTC’s investment accounting experts, Deby MacLeod, Manager and foundations specialization team member at YPTC, Sarah Huang, Tax Principal at Clark Nuber, and Marc Labadie, Executive Vice President at RTD Financial. Each expert brought a unique perspective, and all perspectives are vitally important to ensure success along the path to investing for purpose. 

We’re excited to share highlights of the discussion with you. Read on to learn how you can align your investment strategies with charitable outcomes to make every dollar works harder for your mission and community while ensuring your own financial stability and compliance.   

YPTC: Can you please help us set the stage and explain what we mean by impact investing? 

JIM: Of course. Impact investing involves intentionally aligning the investments of a value-driven investor, such as a foundation, with its philanthropic missions, values, and goals. This type of strategic stewardship seeks measurable social or environmental outcomes alongside financial returns. 

There are multiple types of investment vehicles under the impact investing umbrella.  

  • Socially Responsible Investing (SRI) screens out investments that contradict your mission or values. Excluding funds that invest in fossil fuel or tobacco companies are some examples of SRI approaches. 
  • Mission-related investments (MRI) are investments that support a foundation’s mission and are part of its portfolio. For example, including funds that focus on environmental, social, and governance (ESG) aspects could be part of a foundation’s MRI strategy.  
  • Program-related investments (PRI) are typically alternative investments, such as below-market loans or flexible financing, to further the foundation’s charitable purposes. 

All these strategies are purpose-driven, value-based, and designed to deploy capital strategically for maximum impact. That’s what impact investing is all about.

 

YPTC: Now that we have a basic understanding of the types of investments we are discussing today, how do you build an impact investment strategy? 

MARC: You have to start with the why. Getting everyone aligned internally in terms of what you are ultimately trying to achieve is probably one of the most impactful things you can do prior to having a path going forward.  

Then use financial modeling to help create the how. You will need to project your needs over 3, 5, or 10 years to identify the best strategies for meeting impact goals while ensuring both short-term stability and long-term sustainability. 

You should also ensure you have a fully funded sustainability fund before embarking on an impact investment plan. Industry best practice is to have at least six months of operating expenses in a sustainability fund just for the organization. This should be part of your documented investment policy. Regardless of your plan details, it needs to be documented. Record your agreed-upon investment approach in a clearly written policy that incorporates governance and best practices.

 

YPTC: Who are the players that ultimately need to be at the table during this strategy development process? 

MARC: It’s vital to ensure you know who the right partners are to develop a successful strategy. You may need to recruit new board members with relevant experience or leverage your established peer networks. You may need to partner with trusted advisors like YPTC, tax professionals, and investment managers to fill knowledge gaps.  Having the right voices at the table is critical for success, and not having the right voices at the table can be costly. 


YPTC: What are some common misconceptions nonprofits have about mission-aligned investing? 

MARC: First, a lot of people think that mission-aligned investing is the same thing as SRI, and SRI has gotten a bad name because it is all about excluding companies that are involved in areas that are not aligned with your organization’s mission. This can result in excluding large swaths of the investing world, and that comes with trade-offs. There are techniques out there that allow you to avoid a lot of those trade-offs and allow you to have your cake and eat it too.  

Another misconception is that many times board members are afraid to go down this path because they think once they make that decision, they are locked in forever. When you work with the right partners, you realize that as part of the ongoing review process, this is something you are continuously talking about, tweaking, and making incremental progress. Mission-aligned investing does not have to be rigid and can flex as your investment needs may change over time.  


YPTC: How do you balance financial performance with missional impact in your portfolio design? 

MARC: The key here is that instead of thinking about how to exclude an area of the market, you should focus on how to invest more money in companies who are doing the right things that align with your mission and invest more money in that direction over time.  

Remember, this is a long-term plan. It’s not about creating a perfect solution up front, but getting started with a program that puts your organization in the right direction and slowly building on that.  

For instance, one of my clients wanted to increase their percentage to high-ranking ESG-focused investments over time. They were initially investing around 40% of their portfolio in high-ranking ESG-focused investments, and now, five years down the road, we are sitting at around 82% of their holdings in high-ranking ESG-focused investments. This is what having a clear direction and plan can accomplish for an organization. 


YPTC: Shifting gears a bit, let’s dive into some tax and compliance implications. Sarah, this is really your wheelhouse. What are some of the key regulatory considerations that nonprofits should understand before engaging in impact investing? 

SARAH: First, mission-related investments are often publicly traded on a U.S. Stock Exchange, and they are treated just like any other investment for tax purposes. Of course, international investments may create additional compliance and filing obligations, so it is important to know where the fund you are investing in is domiciled. 

Program-related investments (or PRIs) are a whole different world. These are typically your alternative investment vehicles that further your charitable mission. As a private foundation, PRIs count toward your payout requirements, and they are carved out of unrelated business income calculations. It is very important to understand the cost, benefits, and compliance requirements that these types of investments create. On one hand, you get all kinds of potential tax advantages with PRIs, but on the other hand, it could add a lot of costly compliance and filing requirements. 

We had a client that wanted to diversify and invest in all these alternative investments, but they only put $10-20K into them. When they started to generate unrelated business income at a federal level, they triggered a Form 990-T filing requirement. They also generated state-level unrelated business income, which required them to file 30 state returns. So the tax compliance costs for these funds were $20-30K for their small capital investment.  

You have to understand what you are doing. Work with your investment advisor but also bring in your tax professional who can give you the tax implications as well. It’s important to have that cohesive team approach. 


YPTC: You mentioned unrelated business income tax. How does this tax apply to mission-aligned investments? 

SARAH: Unfortunately, not all nonprofit income is tax-exempt. It really depends on how you are generating the money. Unrelated business income tax rules are complex, so it is critical to work with a tax advisor as you build your investment strategy.  

Plus, if you’re in the private foundation world, you are subject to the 1.39% excise tax. It’s not a huge percentage, but again, those are dollars going to the government rather than your grantees. 

The bottom line is that your income-generating activities, and those of the funds you invest in, matter. For example, using debt to invest in mission-related investments can create federal and state tax liabilities and filing costs.  

I’ll emphasize one more time that you must properly vet your investments, especially alternative investments (not publicly traded), from a legal, tax, accounting, and investment standpoint because without proper advice, you never know what sort of issues will pop up as a result. 


YPTC: We’ve talked about having a clear investment plan and potential tax implications of impact investing. Deby, how do MRIs and PRIs affect an organization’s financial statements?

DEBY: PRI and MRI are not GAAP terms at all and therefore don’t have specific accounting guidance. Instead, we account for investments based on the character of the vehicle. We must dig deeper to understand what the investment is at its core.  

  • Publicly-traded investments are recorded based on fair market value. 
  • Interest-free or below-market loans require imputed interest to be recorded.  
  • Private equity investments, have unique requirements and could be accounted for at fair value, net asset value (NAV), or (in limited cases) adjusted cost, depending on the specifics of the investment. 
  • Recoverable grants can be recorded as a receivable if repayment is probable. If repayment is uncertain, they’re recorded as a conditional contribution until conditions are met. 
  • Real estate investments are accounted for differently depending on whether they are held for investment or charitable purposes. 

There are many different PRI alternative investment vehicles. The important thing to note is the more complicated the investment is, the more complicated the accounting. Alternative investments often result in additional calculations, schedules, reconciliations, and coordination to ensure proper accounting for financial statement purposes. As a result, it is important to ensure your organization has access to the proper expertise, either in-house or through outsourced services like YPTC.  

While cost isn’t usually the primary consideration for investments, it’s important that the organization understands the full picture and potential consequences that alternative investment vehicles can create. In addition to unrelated business income tax and filing fees, alternative investments can require additional accounting expertise or result in increased audit fees as well. 


YPTC: This discussion really highlights the value of a team of advisors when developing any investment plan. With the right team in place, you can rest assured that your mission-focused investment strategy expands your mission without adding unexpected costs and unintentional consequences.  

Want to learn more?  

Join peer networks to collaborate and learn from others’ experiences: 

Reference frameworks as guidelines, such as: 

Track and monitor your incremental progress over time to assess the degree of impact resulting from your impact investment strategy and any adjustments you might need to make. 

Contact information for our panel of experts 

Jim McCormick, Your Part-Time Controller, LLC, james.mccormick@yptc.com  

Deby MacLeod, Your Part-Time Controller, LLC, deby.macleod@yptc.com   

Marc Labadie, RTD Financial, mlabadie@rtdfinancial.com  

Sarah Huang, Clark Nuber, shuang@clarknuber.com  

Disclaimer: The information contained in this article is provided for educational purposes only and does not constitute legal, tax, or investment advice. Readers should consult with qualified professional advisors before making decisions based on the content herein. 

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