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Fed budget could affect foundation spending, but some raise questions about ESG

Budget may address proposals about quota of assets allotted to charities but some see opportunity to require impact investing in return for tax breaks

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In the 2021 federal budget released last April, the government announced that it may require foundations registered in Canada to increase their spending on charitable agencies and activities. The 2022 budget soon to be tabled could proceed with that proposal – as well as others such as strengthening Canada Revenue Agency’s toolkit for dealing with non-compliant foundations.

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More than 10,000 foundations in Canada administer assets totaling close to $100 billion, according to the Department of Finance. The disbursement quota (DQ) requires them to allocate at least 3.5 per cent of their investible assets annually to charitable causes. The current level in the United States is 5 per cent (as was the level in Canada when first established in 1976).

During the government’s consultation round that ended last year, several foundations expressed the view that the government’s proposals don’t go far enough.

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“The disbursement quota deals with only a small percentage of the total assets that foundations administer,” notes Bill Young, founder and president of the Beaulight Foundation. “If our goal is to see foundations generate the greatest impact for operating charities, we need to examine how they deploy all their assets, not just all their grants.”

Pension funds, financial institutions, investment funds, financial advisers and corporations have for years been increasingly urged to invest in line with environmental, social, and governance (ESG) criteria. Many of them have responded by adopting these criteria in part or whole.

Yet foundations don’t seem to draw much attention in this regard, even though they are set up to fund charitable work and there has been sizable growth in their assets over the decade ending 2020. A foundation still largely functions “as a private investment management company that gives away a portion of its excess cash flow,” Young suggests.

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It could be argued that private investors should be free to invest their portfolios in stocks, bonds and whatever else they see fit. But foundations are more of a partnership with the government. They get large tax breaks consisting of close to 50 per cent of the value of donations plus tax-free compounding of returns on the 96.5 per cent of assets retained each year.

“In my view, private foundations should be mandated to invest in assets that parallel their social mission,” says John Phillips, a director at Shopify Inc. and founder of the Northpine Foundation. To justify the major tax deductions, he feels that the donations should be invested with positive social impacts in mind, such as de-carbonization, affordable housing and others.

A lot of government revenue is given up in exchange for an annual return to society of 3.5 cents on the dollar. “It seems like poor public policy to me,” Young said in an interview. “It’s my contention that foundations should be obliged to also undertake socially impactful investments.”

He adds, “Impact investing can mean different things and all that will have to be ironed out.” He further suggests, “It could mean having a negative screen where certain investments like tobacco companies are avoided or it could be a positive screen where investments such as alternative energy suppliers are the focus. It could also mean choosing impact-first investments, where a lower rate of return may need to be accepted to get the desired social impact through channels such as shares in clean energy companies, social-purpose companies, community bonds and so on.”

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Another supporter of impact investing is John Hallward, president and founder of registered charity GIV3. Rather than leave it solely up to individual foundations to make such investments, he recommends in the February 2022 issue of Policy Options that it may be necessary to create a new “social sector fund” financed by a small levy on the assets in Canadian foundations.

The fund would have more than $100 million a year to put to use toward priorities within the non-profit sector. One would be to “support various initiatives, for example, gender equality, indigenous charities and marginalized communities,” writes Hallward.

Discourse on socially responsible investing seems to have mostly bypassed foundations. Indeed, Canadians seem to be unaware of how significant foundations are: Hallward mentions that an Ipsos Canada poll taken in 2020 found only 12 per cent of Canadian adults were aware that foundations had at that time accumulated $80 billion in assets. While the soon-to-be-tabled budget may affect how foundations invest, there is more to think about in terms of how they do so with the most impact.

Larry MacDonald writes at Investing Journey. 

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