Socially Responsible Investing. For many years certain investors, particularly charitable organizations, have targeted their investments in particular companies or funds that align the investments with the investors’ values, or at least do not support what they consider to be harmful. Other investors prefer to invest in “responsible” companies that they believe may outperform over the long run. In recent years this has now been referred to as “sustainable and responsible investment.” Socially responsible investing historically has used negative screens focused on avoiding investments that caused social injury. Sustainable and responsible investment is a broader concept that focuses on companies rated high on environmental, social and governance factors, with emphasis on long-term investing with reduced risk and improved shareholder value.
Impact Investing. For the individual philanthropist, a more recent trend has been “impact investing.” In a White Paper written by Marguerite H. Griffin, National Director of Philanthropic Services at Northern Trust, she describes impact investing as “an umbrella term used to describe investments that create positive social impact beyond financial returns or an investment strategy that intentionally aligns the investments held by an organization, or in its portfolio, with the mission of that organization.” In other words, impact investors (individual investors and institutions) seek to create social benefits, such as alleviating poverty and improving the environment, in addition to financial profits. This approach has created a great deal of excitement in the younger generations and entrepreneurs who tend to favor more hands-on involvement with their philanthropy. One advisor that I spoke with recently, however, cautioned that there is some concern by the traditional community organizations (museums, arts organizations, theaters, etc.) that the desire to be more focused on the individual recipient of the services may hurt the major giving which has been a tradition among the older generations.
Public Benefit Corporation. A related trend has been state corporate statutes which allow “public benefit corporations.” These were adopted in the 2014 Minnesota Legislative Session as new Minn. Stat. §304A effective January 1, 2015. These allow formation of corporations that are organized to achieve a public benefit, which may mean that profitability is not a primary duty to shareholders. In Minnesota, these can be established as “general public benefit” corporations, which means a net material positive impact from the business and operations on society, the environment, and the well-being of present and future generations. An alternative is a “specific public benefit corporation” which means one or more positive impacts or reduction of a negative impact, on specified categories of natural persons, entities, communities, or interests, other than shareholders in their capacity as shareholders, as enumerated in the articles.
L3C. Another entity form, not adopted in Minnesota, is a “Low Profit Limited Liability Company (L3C)”. At last count there were about ten states that had adopted L3C legislation. Although available in those states, there is little Federal tax guidance related to these types of entities, and they are considered a risky alternative for charities and private foundations which are looking at investing in such entities. The goal for foundations is to invest in for-profit entities and still quality for the Tax Code requirement that they distribute 5% of net assets each year for charitable purposes. The investment in the L3C is intended to meet a 3-pronged test: (1) the investment is primarily for charitable or educational purposes; (2) the production of income or the appreciation of property is not a significant purpose for the investments; and (3) attempting to influence legislation or taking part in political campaigns on behalf of candidates is not a purpose. There remains many open questions regarding the qualification of these entities for the foundation distribution requirement, but in the meantime they can be a useful tool for a for-profit business that wants to demonstrate a strong commitment to charitable and/or educational purposes.
Please contact me if you would like further information about these techniques.