Philanthropy reaches the parts impact investing cannot reach

While the popularity of sustainable and impact investing is rising among wealthy individuals, it is undeniable that philanthropy continues to play a crucial role in modern society. Donations are badly needed to address the myriad causes and issues that cannot be fixed by market-based investment ideas, and are unable to pay investors financial return; to tackle crisis situations such as wars or epidemic, and help people in need immediately. 

Philanthropy has been a driver of some of the greatest breakthroughs in public health, including the discovery of a vaccine for polio and the development of antiretroviral therapy to treat HIV infection.

Charitable money provides a very precious form of capital, because it can take risks that neither governments nor businesses want or can take. It is therefore perceived as risk capital or patient capital, and is effectively one of the tools that investors have in their toolkit to achieve impact. 

Moreover, donations can provide funding for projects or organisations at the start-up stage, when risks are higher, or when it is not commercially viable to invest. And once the model is proven, it will attract additional impact capital with a lower risk/return profile. This is the way social impact bonds work. 

On the up

Philanthropic activity has greatly increased around the world over the past decade, following the financial crisis. 

Historically, philanthropists acted alone. Even now, charitable foundations generally operate their own programmes and activities. But that is gradually changing. Billionaire philanthropists, in particular, are realising that the best results are achieved through collaboration, not only with other billionaires, but also with NGOs, charities, and governmental organisations that have expertise and access needed to drive change.

In 2010, billionaires Bill and Melinda Gates and Warren Buffet started The Giving Pledge, an initiative involving 40 US-based philanthropists, committed to giving the majority of their wealth away. Today, more than 180 individuals from 22 countries have taken the same pledge. 

The potential pledged value by 2022 could reach some $600bn, according to Wealth-X, an independent research firm.

Work to do

Yet, a lot more can be done to increase giving, and address barriers preventing the multimillionaires or billionaires to donate even a small percentage of their money.

In the UK, only 50 per cent of multimillionaires donate 1 per cent or more of their annual income to charitable causes, which means that philanthropic donations amount to just 0.5 per cent of UK GDP today, compared with 2.1 per cent in the US. 

A recent report from Barclays Private Bank reveals that one in four wealth individuals indicate lack of faith (25 per cent), and lack of control over how money is used (27 per cent) as major reasons that prevent them from donating more to charity. 

Lack of understanding between charities and wealthy individuals is mainly due to their different culture. 

“Donors often have an entrepreneurial background, they are used to look at the bottom line, which in a non-profit does not exist, and are used to setting a strategy path and then drive forward, not necessarily taking into account the wider context of the decisions they are making,” explains Cath Dovey, co-founder of the Philanthropy Collaborative and coordinator for a number of the activities of the Beacon Collaborative, the UK-wide collective impact movement aimed at doubling current levels of philanthropic giving among wealthy people. 

Charities, on the other hand, put a lot of work into planning an effective grant making strategy, but are often unable to monitor the detailed impact of their programmes, as many charities are small and underfunded. 

A front line charity working with disadvantaged people in a city may be able to measure the number of individuals that were given a shelter overnight or received a hot meal, but unable to measure the impact this help is having on their lives. This would require collecting qualitative feedback from a large number of people to be able to then quantify the impact, which would be extremely resource-intensive. This is the type of information philanthropists often expect to see regarding their donations. 

Also, a charity takes into account the broader context, partnering with other charities and service providers, for example offering employment skills to the homeless. Donors may want to only fund the education part, as they may think that offering shelters may encourage people to live on the street. But that is necessarily only one step in transforming people’s lives. 

Bad press

Scandals involving reputable charities have furthered lack of trust and the assumption that such issues are widespread within the sector, leaving philanthropists feeling betrayed.

But most charities are “extremely good at doing an enormous amount of work on a shoestring budget”, and need to be very entrepreneurial in order to survive, says David Stead, director of philanthropy and development at Charities Aid Foundation (CAF). 

Also, there are many myths around charitable institutions that need dispelling. 

“The biggest myth to debunk is that charities are inefficient and that donors’ money is spent on overheads,” says Mr Stead. But for any charity there is an administrative and operational cost associated to deliver the programme, and not all donated money can go straight to beneficiaries. 

This misconception leads many donors to set up their own charity, believing they can fill a gap or do it better. They should, instead, try and help existing entities achieve a greater impact, or donate through donor advised funds, benefiting from tax incentives. Before money is given away, funds in charitable accounts can be kept and managed by donors’ wealth managers, in sustainable portfolios, so that individuals can do good at the investment stage too, explains Mr Stead.

A consolidation of charities would lead to better outcomes and economies of scale, but often charities are founded by very passionate people who like to drive forward their own projects, sometimes leading to rewarding results. 

Anita Choudhrie, the matriarch of one of India’s most wealthy UK-based families, set up Path to Success in 2005, a small charity focused on ‘turning inability to ability’, with its most recent appeal aiming at empowering female disabled athletes. Funds raised through her business, mainly through fund raising events, are supporting wheelchair basketball and wheelchair tennis athletes, as many of them are heavily underfunded, to help them prepare for the Tokyo Paralympics in 2020. 

“Sport in disability management is very important, it gives people a lot of confidence, it builds up their physical and mental stamina,” says Ms Choudhrie, explaining how crucial it is for her to feel directly engaged in the causes she is supporting, and engage other donors, rather than just simply writing a cheque. And while the wealth generated by her family business supported her charitable activity in the first few years, her own organisation is self-supporting today.   

Role of advice

Advisers, including private bankers, wealth managers, as well as lawyers and tax advisers, have a critical role to play in driving growth of philanthropic capital. 

But while they are extremely focused on explaining to clients how they can preserve and grow their assets, they are often not committed enough to understand what clients are trying to achieve with their wealth. Giving it away, to achieve impact in areas that are close to their clients’ hearts, can be an extremely rewarding experience, and also act as a glue between family members. 

Several private banks such as UBS, Coutts, JP Morgan and BNP Paribas have developed internal expertise, aimed at understanding the client’s motivation to give and helping them identify the best way to achieve their ambitions on the ground. This service is part of the holistic advice wealth managers aim to offer to clients. It can be a differentiating factor too, and helps them deepen the relationship with existing clients, potentially increasing their share of wallet, as well as drawing new customers. 

But the biggest barrier to introducing philanthropy into conversations with clients are private bankers themselves. For most of them, giving them access to the bank’s internal philanthropy advisers is not a priority, as it does not affect their KPIs. 

Many institutions do not have internal resources in this space. Most generally, it is not private banks’ core area of expertise to advise clients on which causes to support and select the right organisation to implement them, especially if clients are not prepared to pay for the service. This often leads them to partner with external providers.

However, philanthropy teams in private banks, generally very small, are usually run by very enthusiastic people, passionate about their work and strongly committed to helping clients achieve their philanthropic goals. One area that is particularly appreciated by clients and gaining traction is helping philanthropists connect with their peers and relevant organisations, enabling them to explore synergies and find partnership opportunities. Networking events aiming a creating philanthropy communities among clients are also very popular. 

Pulling together

“I spend most of my day connecting clients to one another, and that connection can be particularly strong and impactful when you are connecting a philanthropist with another philanthropist who cares about similar issues, and can share best practices or past failures, so they can learn from each other,” says Sheryl Fofaria, head of the Philanthropy Centre, Emea at JP Morgan Private Bank.

While in the past philanthropy has been very siloed, and characterised by individual philanthropists driving their own projects, today there is a growing desire for philanthropists to collaborate to achieve larger impact.  

“Wealthy clients are starting to realise their individual assets are not sufficient to address all the complex problems the world is facing, and by joining forces they can try and tackle some of these complicated issues,” says Ms Fofaria. 

Increasingly, collaborative giving initiatives, so called donor collaboratives, are emerging. A prominent one is Co-Impact, a UK-based collaborative fund launched in 2017 by Olivia Leland, former founding director of the Giving Pledge, and backed by 10 billionaire philanthropists, or core partners, including Bill and Melinda Gates, Richard Chandler, Jeff Skoll and the Rockefeller Foundation. Each core partner typically commits $50m over 10 years to the grant-making pool.

As well as being able to pool significant sums of philanthropic funding, these collaborative initiatives aim to achieve large scale, systemic changes. Co-Impact aims to improve education, health and economic opportunity for more than 8m people in Africa, south Asia and Latin America over the next five years. In January this year, the global collaborative announced $80m in systems change grants across four initiatives. It is currently going through the due diligence process for the second round of grants and expects to award three to six system change grants by the end of 2020.

Other well known donor collaboratives are US-based Blue Meridian Partners, founded in 2016 to help American children and youths living in poverty. Others specialise on specific topics, such as Girls First Fund championing community-led efforts to end child marriage.  Several other collaborative giving initiatives are forming in the climate arena.

The key difference between giving pledges and donor collaboratives is that the latter act almost like fund managers, sourcing the deal, and putting together a coalition of actors who can generate impact on the ground. They usually partner with charities, on which they carry out due diligence, as well as government bodies. 

“There is a lot of partnership potential for private banks with donor collaboratives,” says Ms Fofaria, explaining JP Morgan’s link-up with Co-Impact. “Through a donor collaborative, philanthropists will not only get the opportunity to have a large scale impact but also to learn alongside their peers, share knowledge, ideas and best practices, to really maximise their impact,” she says. Well informed, passionate philanthropists, who have become experts in the field they care about, will be “very good, strategic, effective fighters”, she adds.

Moreover, there are significant cost efficiencies for both donors and charities. Donor collaboratives co-ordinate grant making and reporting procedures, making it more efficient for a charity to report to one organisation only, rather than a number of donors. 

This is crucial as reporting and impact measurement is vital for philanthropists, in particular younger ones. “Younger donors have a laser focus on impact and results, and like to get involved. It is no longer cheque book philanthropy,” says Ms Foforia.

Start young

Educating children about giving and volunteering is believed to be a significant growth driver of philanthropic activity. It is also a growing movement which private banks are encouraging.  

“A big trend we’re seeing is clients wanting to involve their children in philanthropy, even from a very young age, as families are increasingly focused on their values and the purpose of their wealth,” reports Rachel Harrington, director, Coutts Institute at Coutts Private Office. 

The UK bank runs bespoke family philanthropy workshops which are “not just great fun, but have resulted in lots of families getting off the starting line with their giving more quickly and with more confidence and enjoyment”.

The more sophisticated HNW individuals are engaged in both philanthropy and impact investments and are beginning to realise there are ways to blend these tools to create a bigger impact.

“Everything I am seeing day-to-day in my work suggests that donations will increase,” says Ms Harrington. 

There is much greater interest, especially from next generation clients, in social enterprise, purpose-led business and responsible investing. “It is not just making donations. Clients are increasingly connecting the dots and thinking about how they use all of their assets in line with their values and the issues that matter to them.”

Impact investing is not taking away assets from philanthropy, believes Simon Smiles, CIO for UHNW at UBS Global Wealth Management. 

“Impact investing is probably speeding up and further accelerating the need to professionalise giving, ensuring philanthropists generate an impact,” he says.