How impact investors are using donor-advised funds to shift power to the people – and communities

Impact investing, like most investing and even philanthropy, tends to vest power in the hands of those with the capital, who can dictate when and how financing flows to enterprises and nonprofits.

Now, some investors are using donor-advised funds to shift at least some power and decision-making authority to affected communities.

Donor-advised funds are treated as a tax-deductible charitable donation to a sponsoring organization. The donor can then use capital to make grants to nonprofits or community foundations of any amount, on whatever schedule they wish. In the last few years, their popularity has soared: there are now over 728,000 individual DAFs across the U.S., with assets totaling more than $121 billion.

In recent years, financial service providers and investment platforms have rolled out impact investment options for the capital sitting in DAFs. A rethinking of power dynamics has begun to reshape those offerings and the donor’s grantmaking strategy.

“It’s a whole process of unpacking what it means to give up control, and what it means to trust the community,” said Kelley Buhles of RSF Social Finance, which sponsors DAFs. “Especially when philanthropy has ingrained in us to just ask ‘what’s the return on investment’?’”

RSF Social Finance’s DAF program launched in 2010 with options to consult or co-create criteria with affected communities. Earlier this month, they expanded it to include a “community-led funding” option, where grants are determined through participatory grantmaking. In this model, the donor cedes control over how the grantmaking decisions are made to a panel of community members – grassroots organizers, civic leaders, and other members of affected communities. Though still small – of the $80 million in DAF assets managed by RSF Social Finance, about $1 million is tied to participatory grantmaking – Buhles said the option was added in response to investor demand.

“Ten years ago, I was trying to convince people that this is a thing that will work,” she said of the initial offerings. “Now, donors are coming to us because they want to do this work.”

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