November 18, 2014
November 18, 2014
As we draw close to Thanksgiving, the traditional peak giving season begins. Philanthropy in its various forms has long been an important part of the American culture. Colonial society was built by volunteers; Benjamin Franklin created one of the first American civic organizations to generate philanthropic ideas, mobilize public support and raise funds.
Today, charitable giving in the U.S. totals about $350 billion annually. That is close to 2% of the U.S. GDP and the market capitalization of the “Don’t be Evil” Google. This country ranked at the very top of the 2013 World Giving Index, a survey of 135 countries conducted by a Gallup Poll. Importantly, our giving spirit goes beyond cash donations. Details of the survey reveal that the U.S. earned the highest marks for “helping a stranger in need of assistance”, followed by “volunteering” and “donating money to charities”. One can surmise from these data that activism, empowerment, and engagement are all important aspects of the American way of giving.
Similar dynamics can be observed in the investing world. Individuals and institutions are increasingly asking if and how they can express their concerns for society and the environment in the way they invest. Over the last decade, donors and investors have been greeted with many new and innovative ways to accomplish their philanthropic and investment goals. We will highlight a few of these in this article.
The Investing and Gifting Spectrum
The diagram below illustrates the spectrum of different giving and investing approaches, with varying objectives for financial returns as well as social and environmental impacts.
Classic investing seeks financial returns with no specific consideration for environmental, social and governmental (ESG) factors. Maximizing investor and shareholder value is the most important objective. On the opposite end of the spectrum is traditional philanthropy such as donations or grants where financial gains are not expected at all. Frequently, individuals and organizations will use classic investing to fund their philanthropy. Warren Buffett, Bill Gates and Mark Zuckerberg are notable examples of this approach.
The Blended Options
Between these two ends of the spectrum is what we call ’blended options,’ through which investors seek either to avoid social or environmental harm or create positive changes with their investments. These investors may accept financial returns at, above, or below market returns. Examples of these blended options include:
Socially Responsible Investments (SRI)
Socially responsible investments specifically exclude companies which generate negative environment and/or social effects. Producers or distributors of alcohol, tobacco and weapons and companies with poor labor practices are common exclusions. Interest in SRI funds has grown significantly. These funds, commonly public mutual funds or exchanged-traded funds, can be broadly diversified with performance generally tracking that of the broad market over the long-term. Many, however, have more concentrated holdings, reflecting the fund manager’s focus on one or more particular ESG issue(s). These actively managed funds tend to have more significant performance variations from the broad market and carry higher expenses.
Impact investments proactively seek to create positive social or environmental impact beyond financial returns. These may include private loans to finance fresh produce store development in underserved communities (California FreshWorks Fund, for instance), market-rate certificates of deposit in community development banks, venture equity investment in a mobile phone company in rural Africa, land and water conservation fixed-income notes, etc. Currently, impact investment assets account for a fairly small segment of the investing universe – about $50 billion compared to $3 trillion for SRI or $47 trillion for the global equity market. It is a rapidly growing segment and more investment vehicles are becoming available to both institutional and individual investors.
Similar to conventional investments, defining and measuring risks and returns is essential for success in impact investing.
However, short- and long-term social and environmental impacts of a particular investment can be difficult to quantify which make evaluation of the opportunity more complex. For instance, what would an appropriate interest rate concession (or premium) offered by an affordable housing development private loan be, taking into account the related risks (liquidity, credit, interest rate, market) and social benefits (poverty alleviation, job creation, community stability, etc.)? How does one account for the social benefits in financial terms and what are the proper benchmarks for an apples-to-apples comparison with alternative investments?
Direct Giving/Donor Advised Fund (DAF) with mission-based investing opportunities
Donor-advised funds are charitable giving vehicles administered by public charities such as community foundations. They are cost effective and convenient vehicles for charitable giving. Donors can make lump-sum, tax deductible donations and then recommend grants to specific non-profit organizations over time. The sponsoring foundation provides all the administrative support (such as tax reporting) and frequently philanthropic advisory services as well. Typically, funds in a DAF that are reserved for future grants will either remain in cash or be invested as directed by the donor. Some foundations now offer SRI/impact investment options for DAFs. Compared to outright grants through which the funds are simply given away, the return of principal and profit from the SRI/impact investments enables donors to “recycle” and “leverage” their donations to maximize the social/environmental impact.
The diagram below provides examples of various investing and giving vehicles.
Understanding the trade-offs between the myriad of available investing and giving options is not always straightforward. Where you are in the giving and investing spectrum and which vehicle is most appropriate for you will depend on your personal and financial goals. Your BOS team is happy to guide you through the process of finding and selecting the right giving and investing options. Happy Holidays!
“We make a living by what we get. We make a life by what we give.”
― Winston S. Churchill