What DAFs are Learning from the Community Development Sector
By Sam Marks, Chief Executive Officer, FJC – A Foundation of Philanthropic Funds
Donor Advised Funds have caught the imagination of philanthropically minded individuals and families as an efficient option to grow their philanthropic assets and support their favorite charities without developing the burdensome infrastructure of a family foundation. But as impact investing becomes more mainstream, donors are pushing the boundaries of what DAF platforms can do, and they are pushing for more innovative uses of their capital. DAF donors are increasingly interested in going beyond simply supporting their favorite nonprofits and charities. They are looking for more systemic ways to make change, and looking for innovative uses of capital, seeking impact at all stages of the investment cycle.
In short, the DAF sector of philanthropy is beginning to move in the direction of the community development sector. From my vantage points at institutions like Deutsche Bank’s Community Development Finance Group and the Local Initiatives Support Corporation (LISC), I have seen firsthand how large foundations and financial institutions (typically those regulated under the Community Reinvestment Act), have figured out how to collaborate with the public sector and braid different flavors of capital together, be they grants, debt, equity, or program-related investments. In areas like housing and economic development, these parties align risk-return-impact considerations, and they advance a public mission, filling gaps and extending the reach of the public sector.
While the community development sector has demonstrated enormous creativity in financial structuring for public mission, it has only recently begun to tap private wealth as a capital source. This bridge between the worlds of community development and private wealth impact investing has begun to occur through instruments like the Calvert Impact Note, the Contact Fund or LISC NYC’s Inclusive Creative Economy Fund and others.
As the impact investing ecosystem matures, donors have been pushing Donor Advised Funds toward more innovative philanthropic approaches, Increasingly, donors are thinking like community developers, looking to fill gaps in the nonprofit sector left by government and the private sector, and they are looking to put their invested assets to work for mission. The experience of FJC bears that out.
Decades ago, FJC established its Agency Loan Fund to allow donors an option to invest their donated assets in loans to nonprofits, allowing their philanthropic assets to be invested for mission while also earning a return. The loans from the Fund provide early stage, catalytic resources so that its portfolio of nonprofit borrowers can meet urgent needs. Take, for example, the loan FJC closed this summer to Los Sures / Southside United, a Brooklyn-based community organization. Los Sures was sponsoring a program offering free legal services to low-income tenants in rapidly gentrifying Williamsburg, to represent them in eviction proceedings and mitigate displacement by unscrupulous landlords. Communities Resist, formerly a program incubated at Brooklyn Legal Services Corporation A, will be funded by city contracts. However, city contracts are notoriously slow to pay. A bridge loan from FJC’s loan fund allows Communities Resist to meet the urgent needs of Brooklyn residents right away, at a more entrepreneurial pace than their city contract would normally allow.
In addition to choosing impact investing options for their assets like the Agency Loan Fund, donors have also sought to establish revolving funds to support nonprofits that engage in activities where there is a likelihood for recovery. Take impact litigation, for example. Environmental nonprofits are often reluctant to sink significant resources into bringing large civil cases against well-resourced bad actors. Entrepreneurial nonprofits like The Southern Environmental Law Center (SELC) have found donors willing to establish revolving funds that will cover upfront expenses that are recoverable in the event that a case is successful: engaging expert witnesses, making Freedom of Information Act (FOIA) requests, and other early-stage, high-cost expenses. If the case is successful, the funds are replenished. If the case is not successful, SELC is not “on the hook” to repay the fund. For example, SELC recently won a case brought by Flint Riverkeeper against a textile manufacturer to stop contaminating the Flint River watershed south of Atlanta, GA with toxic runoff. Such an arrangement allows these nonprofits to take on big cases that they might not have otherwise. It’s notable that donors interested in the revolving fund option were generally inspired less by out-of-the-box philanthropic tools (e.g. the recoverable grant), and more by passion for the most progressive issues, such as environmental impact litigation or bail bond reform. The donor’s passion came first, the tool later.
So what’s next for DAFs? As with innovation in the community development sector, the best ideas will likely come from listening to the problems that nonprofit innovators are solving for. This will take the time, attention, and focus of both donors and sponsors, and a deep engagement with nonprofit social innovators. But we’re only beginning to tap the potential of what Donor Advised Funds can do. The potential of DAFs need only be limited by the imagination of their donors and the creativity of the sponsors to put ideas into practice.
Sam Marks recently began his tenure as Chief Executive Officer of FJC -- A Foundation of Philanthropic Funds, a boutique public charity that offers a diverse menu of philanthropic services to a range of stakeholders. Prior to FJC, Mr. Marks served as the Executive Director of the New York City local office of the Local Initiatives Support Corporation, and held positions at Deutsche Bank’s community development group, WHEDCo, and Breakthrough New York.