Beyond Grants: Evolving policy and practice to unlock the power of impact investing

The world faces a €3.5 trillion annual gap in financing to achieve the SDGs. Clearly, philanthropy alone cannot come close to bridging this gap, but what it can do is use its capital more effectively. Impact investing – on both the endowment and programme sides – is key to realising this ambition.

However, outdated and rigid legal frameworks, along with traditional foundation practice, are blocking philanthropy from this path. On one hand, current legal frameworks are hindering foundations from better aligning endowment investments with their philanthropic missions, and broadening their toolkit of support beyond grants alone. On the other hand, foundations themselves must be open to these needed shifts in approach and practice.

The good news is that policymakers all over Europe are increasingly recognising the need to mobilise private and philanthropic capital alongside public resources, even though current legal frameworks do not yet allow foundations to fully play this role. And our recent Philea conference showcased many examples of foundations taking more conscious decisions on how they invest their endowments, and how, on the programme side, they are using more innovative instruments of support where possible.

At the heart of these developments lies a simple question: How can foundations use all the resources at their disposal, in a fully enabling legal environment, to support changemakers in creating positive societal impact?

Bridging the divide between organisational mission and investment strategy

While momentum is growing for a shift in practice, across many foundations we still see a strong divide between “philanthropic mission” and “investment” of the endowment. This shows up everywhere – in governance, in incentives, in how teams are structured, and in the often separate operations of programmatic and investment sides. Moreover, boards sometimes take a narrow view of their duty: They tend to focus on perpetuity rather than asking how capital can actively serve the mission today.

At the same time, we see a growing number of social enterprises with innovative models that are becoming more resilient. They may not scale rapidly, but they do challenge one key assumption: What we think is risky versus what is actually risky. However, they often lack access to appropriate capital, an area where foundations can play a catalytic role. Foundations have a unique long-term horizon and flexibility. Their legitimacy comes from creating positive impact. So, they are perfectly placed to bring impact alongside risk and return, and to experiment with new tools beyond grantmaking, such as low-interest loans or recoverable grants, among others.

Legal frameworks should enable philanthropic impact

This historical divide between “philanthropic mission” and “investment” is also reflected in legal frameworks across European countries, as revealed by Philea’s recently updated profiles of the legal and fiscal environment for philanthropy in 40 European countries. This limits the ability of foundations to deploy their full capital strategically, and to act as partners alongside public and private capital.

On the programme side, foundations are often not allowed to support social enterprises or start-ups through impact-oriented approaches. While the rationale for this remains understandable, it is no longer fit for purpose. Historically, policymakers have needed to ensure that foundations – which are set up to serve the public interest, and receive tax benefits for doing so – don’t enrich private actors. However, in the changing landscape where civil society and social economy approaches are no longer operating in silos, current frameworks risk preventing capital from being used where it can have the most impact. Foundations’ partner organisations are asking for more innovative tools to get their projects off the ground.

On the endowment side, our legal analysis shows that foundations face legal restrictions that mean they often have to preserve the real value of the capital, or that they are only allowed to invest in low-risk, secure products that deliver a certain return and ensure perpetuity where applicable. This limits their ability to align investments with their mission, which results in missed impact opportunities for the public good. At the same time, some foundations operating in favourable environments (see below) have long-standing track records of impact and mission-related investments with carve-outs of their endowments. This demonstrates that there is no longer a need to compromise on returns. A growing number of foundations consider that putting impact at the centre of investment decisions is more urgent than ever in a world where entire regions risk becoming uninsurable, and even unbankable.

While most countries lag in evolving their policies, the Netherlands stands as a notable exception. After a sectoral advocacy effort, the legal environment in the country has become much more favourable for foundations to do impact investing. Also in the canton of Zurich, Switzerland, foundations are now allowed to use impact investing tools. In the United Kingdom, there is a widespread understanding of the complementarity of philanthropy and impact investing, which is also reflected in government structures. These developments show that change is both possible and already underway. Against this backdrop, a shift in how foundations deploy their capital is gaining momentum. Overall, however, the current toolbox for foundations in Europe remains too restrictive.

At the same time, the European Union is increasingly shifting towards co-investment approaches within its funding frameworks. The next EU Multiannual Financial Framework offers a window of opportunity to systematically integrate philanthropy. But without appropriate entry points and enabling rules, foundations will remain largely excluded from co-designing and co-investing in EU priorities. This, in turn, represents a missed opportunity to mobilise additional capital and expertise.

Foundations are uniquely positioned to act as partners in this ecosystem. Beyond capital, they bring long-term perspectives, local reach, and the ability to take risks where public or private actors cannot. When properly enabled, they can act as co-investors, co-funders, and implementers. As such, they can complement public investment and strengthen the impact of shared initiatives.

Towards a holistic, modern approach to philanthropy

Foundations have the opportunity – and responsibility – to rethink how all their capital serves their mission. This requires more than incremental change. It requires aligning governance, incentives and investments with public-benefit objectives.

Policymakers can enable this shift by lifting restrictions and modernising legal frameworks to expand the financial tools available to foundations. The tools, examples and expertise already exist. What is needed now is an enabling policy environment that allows these approaches to scale and expand – not only within foundations’ own countries, but also across borders.

The question is no longer whether capital has an impact: It is whether foundations have the mindset, and the enabling environments, to use their full capital to achieve impact.