In just over a decade, impact investing has grown from niche to mainstream, a trend that has caught the attention, if not the commitment, of US foundations. Worldwide, investors of all types have poured upwards of $715 billion into companies that seek both social impact and attractive financial returns.

Foundations have compelling reasons to join in. Impact investing expands the scale and scope of a foundations’ work beyond what is possible with grantmaking alone. Yet, to date, curiosity about impact investing runs higher than application.

Some 88 percent of respondents (almost three-quarters of whom manage less than $10 million in assets) to a recent Foundation Source poll declared they were at least “somewhat” interested in impact investing. Yet, many still haven’t acted on that interest. Thirty-eight percent said they simply “don’t know enough about” impact investing to give it a try.

Philanthropic investments for social benefit aren’t new. Since 1969, the IRS has permitted foundations to deploy loans, loan guarantees, and equity investments in support of nonprofits and for-profit business enterprises. The IRS calls these programrelated investments (PRIs) because, to qualify, they must further a foundation’s charitable mission. Monetary gain can’t be the primary motivation. Given the charitable intent, the IRS regards PRIs as akin to grants and includes them in the minimum 5 percent annual payout that a foundation must make to maintain its tax-favored treatment. Unlike grants, PRI investments generate financial return, though typically below market rates. Investment proceeds fund future grants or investments, recycling scarce philanthropic dollars.

In addition to PRIs, foundations can use their endowments for mission-related investments (MRIs) that align with their philanthropic goals and seek to generate a competitive rate of return. Unlike PRIs, MRIs do not count as part of a foundation’s annual 5 percent payout.

Traditionally, grantmaking and endowment investing have functioned as separate activities, one championing social change and the other financial gain. “But the emerging field of impact investing invites a productive collaboration between these two disciplines,” impact investing advocates Jed Emerson and Amy Chung wrote six years ago.

Today, that potential for productive collaboration has led a number of foundations to reimagine themselves as asset managers for social good, not just grantmakers. It’s a mindset shift that requires foundations to think holistically about how best to deploy their assets to effectively address the problem at hand. It also requires foundations to embed impact investing in strategy and to make the staff and operational adjustments necessary to carry through.

With both the potential and the challenges in mind, The Kresge Foundation engaged The Bridgespan Group to summarize the current state of impact investing in institutional philanthropy. Our research included a review of numerous articles and reports, drawing on the research and experience of organizations like the Mission Investors Exchange, Omidyar Network, and Rockefeller Philanthropy Advisors. We also interviewed impact investing leaders who shared practical advice and described timely initiatives that put impact investing to work in pursuit of racial equity and justice, and in emergent collaborations. We begin our report with an overview on the basic tools of impact investing that position foundations to advance their goals beyond grantmaking, a powerful motivator for those on the sidelines of impact investing to take a closer look.