Private foundations make grants and investments that help good causes. But foundations must distinguish between socially responsible investing and program-related investments on the other. What's the difference?

While skittish investors chase elusive returns amid the risks of the credit market meltdown, a calmer class of investors has been steadily growing in number and influence. They regard an investment's performance only after giving careful consideration to its greater purpose. Socially responsible investing (SRI) — sometimes also known as mission-related investing — is centuries old but came to the fore in the latter half of the last century, in the struggles of South African apartheid and other causes. Now its growth has accelerated.

Between 1995 and 2007, the value of SRI assets grew 324 percent in the United States, compared with the 260 percent growth of assets under professional management generally, reports the Social Investment Forum. And between 2005 and 2007, SRI increased 18 percent, far outstripping overall assets' three percent growth (2007 Report on Socially Responsible Investing Trends in the United States). While much of that growth has been in mutual funds that screen their investments according to social and environmental values, a major force has been "mission-driven institutions such as foundations," the Social Investment Forum report says. And that's not surprising, given that private foundations are becoming more prominent, especially in charitable giving by families (Advising Private Foundations).

CPAs advising charitable organizations must reckon with the rules that come into play when investing seeks both a return to the investor and the higher good. Although a private foundation usually seeks to make its income-producing investments in a socially responsible manner, only program-related investments (PRIs) are defined in the Internal Revenue Code (IRC § 4944(c) and related Treas. Reg. § 53.4944-3).

This article has been excerpted from the Journal of Accountancy. View the full article here.