To create change, improve lives, or find a cure, philanthropists must approach their work as an investment and not simply as a gift. By definition, gift giving requires nothing in return. So when our sector talks about major gifts or big givers, we lose track of what effective philanthropy should be: a carefully constructed investment with a clearly articulated return.

For 13 years, I have been co-trustee of a $20 million, small-staffed foundation. I also serve as CEO of Exponent Philanthropy, America’s largest association of funders. Every day, I meet passionate philanthropists who strive to create outsized impact. Without exception, they are good stewards of their philanthropic assets and pay careful attention to best practices in managing financial portfolios.

A detailed investment policy statement (IPS) is one best practice used by foundations and other philanthropists. Using strategies such as diversified allocations, risk assessment, and asset rebalancing, the IPS is well known in the world of foundation investing as a prudent financial management instrument with many benefits: coordinated investments, a focus on specific goals, and clear communication. For example, if your mission involves being able to respond immediately to a natural disaster or emergency, you’ll want to keep a predetermined amount of cash on hand. An IPS provides this direction and increases your opportunities for success.

I contend there is another kind of IPS—relating to grant giving rather than investment strategy—that can serve as a useful guide for philanthropists. Just as the traditional IPS is a road map for managing a financial portfolio, the “other” IPS offers guidance for managing a grantmaking portfolio using many of the same strategies. It can aid in investments in nonprofits, where returns are measured in social good rather than in dollars and cents.

The “other” IPS is grounded in careful consideration of the following factors, which parallel financial priorities:

Tolerance for risk. Consider your tolerance for risk in the projects and organizations you support. Will you sleep better knowing your grants have gone to solid, well-established programs that—although they may not break new ground—will reliably return predictable outcomes? Or are you a visionary who can see the potential a new nonprofit or a new project holds, and are you willing to make a grant that might fail but also has great promise? In my role as a trustee of a private foundation, I supported a medical study with the potential to positively impact middle-school-aged boys, but the hypothesis was later disproved. We recognized and accepted that risk going in, and we limit the amount of funding we put into high-risk grants to ensure fiscal responsibility.

Diversification. Investors tend to maximize financial returns by spreading their investments across a range of risk classes. In the same way, an organization’s other investment portfolio might include grants to a variety of recipients, from well-known, tried-and-true partners that you can count on to meet objectives (think Treasury bills) to nonprofit start-ups where both risk and reward are high (venture capital). As noted above, we limit our high-risk investments and are intentional about what percentage of grants should go into funding growth, international programs, and so on.

Time horizon. Applying financial investment strategies to your grantmaking portfolio requires some consideration of time horizon. Are you investing for the long term or short term? Will you function in perpetuity or sunset according to a defined timeline? Your answers will help define the kinds of projects in which you are wise to invest. If you are thinking in the near term, projects that could take years to show results may not be right for you. Working with our investment manager and a planned timeline for grant distributions, we manage funds to meet our goals. At the same time, we recognize that we want to be responsive to extraordinary needs and keep a cash reserve.

Dividend reinvestment. One by-product of a solid investment is a return in the form of a dividend. On the financial side, that return takes the form of money, which you may then reinvest. In grant giving, the dividend might result in knowledge gained, connections made, or lessons learned. The question then becomes: What do you do with these valuable assets? By reinvesting your knowledge and sharing your experience, you reinvest in the nonprofits you support and, in fact, the community as a whole. Perhaps the most fulfilling part of working with grantees is reinvesting in them as we learn from them. One such investment was a covening of educators, practioners, and government officials we organized to share knowledge in their common field.

Discipline Determines Impact

Wise investors understand the risks inherent in any investment strategy. No matter how much they guard against it, failures occur. Some stocks underperform, companies can go bankrupt, and unforeseen circumstances can derail the most prudent choices.

The same is true in philanthropy, where creating social impact is decidedly more complex than simply giving away money. Some grants fall short of desired goals while others fail outright. Realizing and understanding these potentialities underscores the need for a disciplined approach to grantmaking, which we can achieve by embracing the “other” investment policy statement.

When you detail your giving strategy in the same way you construct your investment policy, you reduce risk and maximize your return on investment. It’s what we at Exponent Philanthropy like to call outsized impact.