The term “impact investing” is said to have emerged in 2007 as a descriptor for deploying capital not only to achieve financial returns, but also to foster social progress and/or avoid harm to people and the environment. 

Since then, impact investing as a discipline among individual and institutional investors, has grown rapidly. According to Barron’s, a total of $502 billion was held in impact investments in mid-2019. A year later, that number stood at $715 billion – an increase of more than 42%. 

As inquiries from your clients increase, and more and more of them ask for your help in exploring impact investing options for their philanthropic and non-philanthropic dollars, keep an eye on opportunities that seem to promote having the cake and eating it, too. 

For example, in a recent private letter ruling, the IRS denied an organization’s application for 501(c)(3) status because the activities it proposed  – creating an investment fund to carry out typically “charitable” activities – were not viewed by the IRS as charitable for tax purposes. The taxpayer requesting the ruling had proposed activities such as economic development in low-income communities and initiatives to fight climate change.

Though an eyebrow-raiser at first glance, the ruling ultimately does a nice job of reinforcing the distinction for tax purposes between program-related investments, which is itself a charitable activity, and mission-related investments, which is not a charitable activity.

It’s relatively easy for investment-focused professionals to miss the distinction, but the distinction is critical for proper tax treatment. A program-related investment (PRI) must significantly further a charitable purpose and can’t have a significant investment purpose, which effectively means that the investment is not one that a pure investor would be likely to make because its possibility of achieving competitive returns is extremely slim.  

On the other hand, a mission-related investment (MRI) still has to meet prudent investment standards, even if it might not be the most profitable investment option on the market because it is taking mission into account. 

The challenge for you as an advisor is to help your clients evaluate impact investment funds that appear to promote financial returns simultaneously with community good, with an implication that tax benefits are somehow woven into the offering, which may well be too good to be true.