The last few years have seen an increasing number of foundations engage in a wide spectrum of impact investing i.e. investing to generate a social return and further their mission or a social purpose, rather than investing to simply generate a financial return. 

In the past, the regulatory framework regarding impact investments was relatively unsophisticated in both the United Kingdom (UK) and the United States (US), leading many foundations to avoid making impact investments that they may have otherwise wished to pursue. The good news: in recent years the relevant regulators (i.e. the IRS in the US and the Charity Commission in the UK) have issued guidance confirming that Mission Related Investment (MRI) and Programme Related Investment (PRI) is permitted.

So whilst the traditional “5%/95%” approach to managing foundation capital involved a series of annual grants, and then invest in a broad set of equity, fixed income and other assets without regard to mission-related factors, more and more foundations are now exploring ways to put their funds to work at other points on the impact investing spectrum. In this article, we briefly explore the nature and scope of MRIs and PRIs.

(i) MRIs



Describes a way of making financial investments that also help a foundation to achieve its aims directly.  By way of example, let's take a foundation set up to support those with addictions.  That foundation, on reviewing its investment portfolio, chooses not to hold any securities in companies which promote alcohol or gambling. That foundation is, therefore, making an MRI.

Must not cause a foundation to come to significant financial harm or place assets at financial risk. So, for example, a foundation that promotes active lifestyles may make an MRI in a fitness company that is likely to yield a market rate financial return – an anticipated financial return is still a driving force behind the investment.

A UK perspective:

Traditionally the duty of charity trustees in the UK in investing their charity's funds was to obtain the best financial return possible. This was so irrespective of whether or not the financial products that yielded the best financial returns aligned with the charity's charitable purposes.  Charities were therefore required to keep two financial "pots" – one to spend in furtherance of their charitable objectives (e.g. to use to fund a soup kitchen) and one to invest to generate funds for the future (e.g. purchasing shares).  A charity could not combine the two.  

The Law Commission carried out a consultation in summer 2014 on the law relating to investments in the charity sector, as set out in the Charity Commission's guidance note on investment matters (CC14).  The outcome of that consultation was the introduction of the Charities (Protection and Social Investment) Act 2016 (the 2016 Act) (and subsequent update to guidance note CC14). The 2016 Act gives charitable foundations (and other types of charities) the power to make social investments (e.g. MRIs) and therefore enables charitable foundations to recycle their funds and therefore make their funds work harder.

When deciding whether to make a social investment, as well as complying with their general legal duties (e.g. the duty to act only in their charity's best interests), charity trustees must comply with the additional duties set out in the 2016 Act, namely the duty to:

Consider whether in all the circumstances any advice about the proposed investment ought to be obtained. Depending on the context, a range of advice might be required, including advice on the legal, financial, or accounting aspects of the proposed investment.

Obtain and consider any advice which they believe ought to be obtained in the circumstances.

Satisfy themselves that it is in the best interests of the foundation to make the MRI, having regard to the benefit they expect it to achieve for the foundation, by directly furthering the foundation's purposes and achieving a financial return. 

Whilst impact investing is on the increase in the UK, with some high profile charities using impact investing to support their core missions, it is still a relatively new market.  One such high profile charity is Guy's & St Thomas' Charity, the UK's leading place-based health foundations.  In relation to its impact investing that charity has stated: We are taking 'the road less traveled and are truly excited about where this new approach will take us.[1] It remains to be seen how many more charities will take the 'road less traveled'.

A US perspective:

It seems that the US foundations are leading the way in MRI following the announcement just last year by Ford Foundation that it will commit USD 1 billion of its USD 12 billion endowments to MRIs over the next ten years; this is the largest commitment of philanthropic endowment to impact investing.  The Foundation will begin by focusing on investments in affordable housing in the US and access to financial services in emerging markets.[2] 

As in the UK, MRIs in the US might take the form of screened portfolios to identify risks within the portfolio based on environmental, social and governance (ESG) criteria. Many socially responsible mutual funds may be considered an MRI. MRIs are therefore a valuable tool for a foundation seeking to advance its mission in “the other 95%” of its portfolio. A growing number of “traditional” strategies in equities, fixed income, and other asset classes allow endowments and foundations to align their portfolios more closely with their missions, without sacrificing performance.

Historically, many foundations were hesitant to pursue MRIs because of a lack of guidance surrounding the regulatory and tax consequences of such investments. While the IRS provided a statutory exemption from the jeopardizing investments rule for PRIs - jeopardizing investment rules may impose a tax on a private foundation for any investment that might jeopardize the carrying out of its tax-exempt purposes – no such exemption exists for MRIs. As a result, many fiduciaries were uncomfortable with MRIs; they reasoned that if an MRI could potentially produce reduced returns or increased dispersion from a benchmark due to consideration of ESG factors, it may be considered a jeopardizing investment. However, the IRS provided much more concrete guidance on this topic in 2015. IRS Notice 2015-62 stated that foundations may consider a full range of factors when exercising prudence and that nonprofits “are not required to select only investments that offer the highest rates of return, the lowest risks, or the greatest liquidity.” Further, it stated that MRIs will not be viewed as jeopardizing investments “so long as the foundation managers exercise the requisite ordinary business care and prudence” in evaluating them. Finally, it stated clearly that any potential MRI should be evaluated on a case-by-case basis, and once a determination is made to the contrary, it will not be judged a jeopardizing investment even if it ultimately loses money. The upshot of all of these developments is that foundations now have a much clearer regulatory runway than ever before for launching a more expansive mission-aligned investment strategy.

Of course, it is still perfectly valid to view a portfolio’s capacity for impact based on its annual spend rate. Many foundations in the US currently operate this way and will continue to do so for many years, and will no doubt fund important work that advances their organizational missions. However, if a foundation wishes to look at options outside of the 5% or similar amount that it spends each year on programs, there is a wide range of tools they can use to leverage the other 95% of its portfolio. In so doing, a foundation may create greater alignment with its mission, more opportunity for engagement with its key outside stakeholders and greater progress toward its programmatic goals.

(ii) PRIs


In general, PRIs allow a foundation to directly further its aims and, at the same time, potentially achieve a financial return.  PRIs, unlike MRIs, have a tolerance for below-market financial returns – the driving force is to further the mission, not to generate a financial return.

PRIs often take the form of loans, equity investments or pooled funds.

By way of example, let's take a foundation that works to relieve poverty.  That foundation may give a loan to another charitable organization that helps unemployed people back to work.  This will (i) relieve poverty (wholly in furtherance of the foundation's aims) for the public benefit, and (ii) be expected to achieve repayment of the loan and a financial return from interest payments (although those are likely to be negligible given the current financial climate). That foundation may also provide financial services to low-income communities or invest in companies that are creating jobs or which can build affordable housing.

A UK perspective:

PRIs have a long history in the UK, dating as far back as the Victorian era when philanthropists sought to develop housing for the poor and to provide interest-free loans to those wanting to set up their own businesses. Against this backdrop, it is therefore unsurprising that foundations in the UK, particularly grant-making foundations, appear to have embraced PRIs more than MRIs. Household names that have embraced PRIs in more recent times include The Tudor Trust, The Baring Foundation, the Sainsbury Family Charitable Trusts[3] and the Wellcome Trust.

Given that the sole justification for making a PRI is to further a charity's charitable aims, this means that they are not investments in the strict legal sense and so charity trustees are not bound by the investment duties in the 2016 Act. When making a PRI, charity trustees must simply (i) act in the best interests of their charity; (ii) ensure that their charity's funds are only used to further its stated aims; and (iii) ensure that any private benefit arising from the investment is necessary, reasonable and in the interests of the charity.

A successful PRI can be a very useful tool for a charity in that it can enable a charity to, for example (i) make a long-term, flexible investment that directly furthers the charity's aims i.e. at low-interest rates, interest free or involving repayment (partly through in-kind services); (ii) improve the terms on which charities are offered finance, thus enabling finance to be accessed at a lower cost (it may allow charities to access finance where they are otherwise unable to do so through traditional lenders); (iii) increase the help they can provide; if the investment is recouped and/or yields a return for the foundation, then the resources can be reused to support a greater number of projects (iv) encourage the charity recipient to become more financially responsible/self-sustainable, and reduce reliance on traditional forms of grant funding.[4]

A US perspective:

In the US, PRIs are defined by statute as an exception to the jeopardizing investment rules. The Internal Revenue Code states that private foundations are able to invest in PRIs and that such investments are not considered jeopardizing investments, so long as the investment a) has the primary objective of furthering the charitable purpose of the organization and b) does not have income or capital appreciation as a primary objective.

In 2012, the IRS issued further guidance that confirmed PRI “status” for an expanded set of investments, such as investments supporting charitable activities in foreign countries, credit enhancement or guarantee arrangements, and a wider variety of charitable purposes, such as environmental programs, disaster relief, advancement of science, etc. In addition to the mission-aligned progress that PRIs aim to achieve, certain PRIs offer an additional benefit: They can be considered qualifying distributions that satisfy the distribution requirements for private foundations in the year that the investment is made. A traditional qualifying distribution, like a grant, is a one-time use of capital, but a PRI may allow a nonprofit to leverage its assets more effectively. For example, a below-market-rate loan to an organization might produce similar impact to a comparable grant, and if and when repaid, the nonprofit would be able to use those assets again—plus any interest earned—to further its mission. (We should also note that if the PRI turns out to provide attractive income or capital appreciation, there is no subsequent tax penalty for the fact that it succeeded.)


With the increasing challenges that foundations face in fulfilling their missions – limited grant funding, difficulties in attracting donations, mistrust amongst the public of the charity sector (particularly in the UK) etc – it seems sensible for foundations to consider pushing the boundaries by embracing impact investing and looking at the opportunities it provides for them.

Brigid Peterson:

Brigid Peterson is a Partner and the Endowments & Foundations Advisor at Brown Advisory. She has extensive experience working with nonprofit organizations and foundations, as well as advising families on structuring their philanthropic legacy.  As a member of Brown Advisory’s Sustainable Investing Development Team, Brigid often works with clients to develop a mission-aligned portfolio. More about Brigid here.

Alison Smullen:

Alison is an Associate in the Charities Team at Womble Bond Dickinson in the UK.  Alison has experience in setting up charities (including charitable foundations) and advising those on all aspects of charity law (include trustee duties in relation to investments).



[2] The 2018 Annual Impact Investor Survey by Global Impact Investing Network, page 15.

[3] Foundations and social investment, making money work harder in order to achieve more (October 2005) by Margaret Bolton

[4] Charity Commission guidance document CC14