Philanthropy is changing before our eyes. The last few years have seen innovation, new tools and more resources than ever devoted to making a difference in our communities and beyond. Here are some of the most important and exciting trends.
The Rise of Impact Investing
In the United States, nearly $1 trillion is committed to philanthropy—sitting in foundations, donor-advised funds (DAFs) and elsewhere. Donors have transferred ownership of these funds to separate entities and received their tax deductions. Yet, only a small percentage of those funds is expended on charitable donations for the public good. The great majority of those resources are invested for a financial return without regard to the impact on society.
Philanthropically committed funds are traditionally divided into two silos: grants for social impact and investments for financial growth.
Grants to nonprofits are designed to maximize social impact by providing critical support to worthy causes. They can be viewed as a “social investment” with a 100 percent negative financial return for the donor. Once given, the funds never come back.
Invested funds are another story. The bulk of philanthropically committed capital is invested in publicly traded securities or private markets for maximum returns.
However, like grants, those investments may affect a variety of social issues, such as the environment, immigration, labor practices, food, education, resource consumption, gender pay disparity, health care or fighting human trafficking or discrimination. Sometimes, foundation or DAF investments actually counteract the very mission for which the funds were donated. That is, they may actually make it worse for the mission for which the funds were donated, or even thwart the mission entirely.
Recently, philanthropic and investment leaders have come to recognize that grants and investments can have both financial returns and social impact—and that strategic alignment and integration with mission is important to maximize change.
One of the clearest and smartest voices in the modern philanthropic landscape is Clara Miller, president of the $300 million Heron Foundation (Heron). Heron’s mission is to help individuals and communities lift themselves out of poverty.
I recently spoke with Clara in connection with the release of her thought-provoking essay, “Building a Foundation for the 21st Century.” She said:
Grant-making and investing operate in a balance of church and state—one devoted to ethereal good, the other to gritty extraction of financial returns.
Baked into this structure is the fundamental belief that mainstream profit-making cannot be philanthropic and philanthropy cannot be market-connected, that grants could not be available without the profits that only unfettered capitalism can provide and that the best use of philanthropic grants is to finance nonprofits to be a cleanup crew for the inevitable mess real capitalism leaves in its wake.1
Clara urges her peers to recognize that every enterprise impacts the environment and society in the course of its business—through its products and services, treatment of workers, supply chain and more. All investing has impact—whether positive or negative.
Increasingly, philanthropists are asking the managers of their philanthropic capital, “Where is my money spending the night?” By aligning money and mission, foundations and DAFs are allocating significantly more resources to achieve their goals. The world’s problems are being addressed using the full engine of philanthropically committed assets—not just the fumes.
Growth of PRIs
In the Tax Reform Act of 1969, the Internal Revenue Code permitted a giving vehicle for foundations, called “program-related investments” (PRIs). A PRI is a method of making capital available to both nonprofits and for-profits that are addressing social or environmental concerns.
The Internal Revenue Service recently issued new regulations2 that encourage foundations to enhance the impact of their philanthropically committed capital by using PRIs when investing at least some of the significant funds that sit in endowments. These regulations give nine new examples of different types of PRIs.
Along with grants, PRIs can be part of an integrated strategy to achieve a foundation’s mission.
With a PRI, a foundation lends to or invests its endowment assets in a nonprofit or for-profit entity in a way that furthers its mission. At the same time, the investment has the potential of providing a positive financial return to the foundation.
To qualify as a PRI, three key criteria must be met:
• The investment’s primary purpose must be to advance the foundation’s charitable objectives.
• Neither the production of income nor appreciation of property can be a significant purpose of the investment.
• The funds can’t be used directly or indirectly to lobby for political purposes.
Examples of PRIs include:
• Making a low interest rate loan to a nonprofit to pay off a building mortgage—saving the nonprofit significant interest over the life of the loan.
• Making an investment in a for-profit company researching and developing an “orphan drug” to help cure a disease that primarily affects people in developing countries.
• Investing in or lending money to a nonprofit or for-profit in a developing country that creates a recycling program to prevent pollution.
• Lending money to or investing in small businesses that employ people after a natural disaster or in a low income area where commercial funds aren’t readily available.
PRIs help foundations solve social and environmental problems by allowing them to use market-based tools to grow and recycle at least a portion of their sizable philanthropic assets for future use.
Women Taking the Lead
Women have changed the face of philanthropy. With more money and increased control and influence over how it’s spent, more women than ever are making philanthropic investments to help address and solve the problems of our time.
Consider these facts:
• Women in the United States represent 51 percent of the nation’s Ph.Ds, 67 percent of college graduates and more than 70 percent of undergraduate valedictorians.
• In the United States, women run more than 10 million businesses with combined annual sales of $1.1 trillion and make 80 percent of consumer buying decisions.
• Twenty-six percent of working wives in the United States make more than their working husbands.
• Female-headed households in this nation are more likely to give to charity than male-headed households, and at nearly every income level, women donate almost twice as much to charity as men.
• Women will inherit 70 percent of the $41 trillion in inter-generational wealth transfer expected over the next 40 years in the United States.
• By 2025, 60 percent of billionaires in the United States are expected to be women.
• Women now control more than half of the private wealth in the United States.
• Yet, out of every dollar granted by U.S. foundations, less than 8 cents funds programs for women and girls.
Women are leading philanthropy on two fronts: by developing programs that help them become better, more strategic philanthropists and by joining charitable ventures dedicated to addressing issues facing women and girls.
For generations, women have worked collaboratively in quilting, canning, book and investment circles. The same drive to learn and act collectively has spawned women’s giving circles, where women combine donations and make collective decisions about which causes to support.
“Women are more comfortable working in community, making decisions together, pooling resources and leveraging their collective impact than men,”3 says Donna Hall, president of the Women Donors Network (womendonors.org), a national network of women philanthropists that leverages more than $150 million a year toward solutions that address the root causes of injustice and inequality.
Women Moving Millions (womenmovingmillions.org), founded by sisters Swanee and Helen LaKelly Hunt, brings women together to significantly increase the amount of funding that supports the advancement of women and girls globally.
Other national resources include the Women’s Funding Network (womensfundingnetwork.org), a growing community of more than 100 women’s funds and foundations spanning 20 countries, and the Global Fund for Women (www.globalfundforwomen.org), bringing grantees and donors together in an international network that promotes women’s action for social change and justice.
Judith Rodin, Ph.D., president of the Rockefeller Foundation, stated that to change the world, “the single most important thing we can do is unleash the full power of half the people on the planet—women.”4 Women are flexing their individual and collective muscles, searching for deeper, sustainable solutions to pressing problems, giving more thoughtfully and strategically and achieving greater outcomes with philanthropy than ever before.
Crowdfunding Fueling Philanthropy
Crowdfunding is a rapidly expanding Internet tool designed to allow large numbers of individuals to invest or contribute money in support of new businesses, people in need, interesting ideas or important causes. Its recent growth is impressive.
In 2015, philanthropy crowdfunding raised nearly $3 billion for charity. Increasingly, people are associating crowdfunding with an easy and effective way to contribute money for a wide variety of good philanthropic causes.
While traditional fundraising typically focuses on large donations from a few donors, crowdfunding turns that model on its head by generating small donations from many donors. This vastly expands opportunities for donors to connect with causes that matter to them and for nonprofits to find new donors.
The use of Internet technology democratizes philanthropy as never before, making it easier for everyone to participate. Campaigns can go viral and become available to far more potential donors than ever before.
Crowdfunding can create a new community of previously unconnected people with a shared passion for the same cause. As a platform for cause-related marketing, it’s an attractive option for business donors as well as individuals. It’s an especially appealing venue for younger, more tech-savvy donors like Millennials.
For a partial list of crowdfunding websites that encourage philanthropy, see “Raising Money,” this page.
Crowdfunding has emerged as an exciting and effective tool for both donors and nonprofits. By leveling the playing field, it allows many small donors meaningfully to participate in important causes. Plus, it connects donors and nonprofits in creative, educational and easy-to-access ways.
Innovative Structures Debut
In 2015, Mark Zuckerberg and Dr. Priscilla Chan made headlines when they pledged to give 99 percent of their Facebook shares—currently worth about $45 billion— to charitable purposes. However, no charitable donation was made. Instead, the couple pledged to transfer ownership of the shares to a new limited liability company (LLC): the Chan Zuckerberg Initiative. This LLC will sell the shares and donate the proceeds to charity, invest in other for-profit entities, contribute to political efforts and deploy funds in other ways to “advance human potential and promote equality.”5 The organization intends to focus on improving education, curing disease and strengthening communities. It’s first investment, in June 2016, was in a startup company that trains African engineers for jobs in the tech industry.
“By using an LLC instead of a traditional foundation,” said Zuckerberg, “we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively.”6 Sophisticated philanthropists are looking for similarly innovative ways to deploy capital to achieve their charitable goals.
A Separate Discipline
Affluent individuals and families recognize the need to plan for their future security and their legacies—and often go to great lengths to do so. Usually, they work closely with experts who make up three legs of the planning table and help them achieve sophisticated tax, financial and estate-planning goals.
Tax experts advise about the tax consequences of income and investments and work to reduce tax liability. Financial advisors guide investments and help assure long-term financial security. Estate planners (sometimes working with insurance experts) help establish legacy vehicles to achieve lifetime goals and support for descendants.
Each of these experts also can play a role in the development of philanthropic plans, which constitute the essential fourth leg of the planning table.
Tax advisors can help clients understand the tax ramifications of their philanthropic efforts. Financial advisors can help determine charitable giving capacity; they also can manage philanthropically committed assets. Estate planners can establish foundations, DAFs, charitable trusts and bequests.
However, philanthropy isn’t their primary focus. As valuable as these experts are in their own specialized fields, they’re rarely experts in the techniques, strategies, tools, impacts and evaluation of philanthropy.
Becoming an effective philanthropist (rather than merely a generous donor) means planning to optimize the efficacy of giving. Through this tested process, philanthropy becomes transformational (rather than just transactional) for both the donor and the community.
The same intellectual resources and rigor that were used to earn money in the first place should be applied to philanthropic efforts to distribute that money. To generate wealth, the successful entrepreneur, executive or investor relies on tools like research, analysis, expertise, strategy, organized implementation, careful evaluation and constant adjustment. By using these same tools, philanthropists will achieve greater social returns and impact. In addition, they’ll be far more satisfied with the results for themselves and their families.
Increasingly, experienced philanthropic consultants are acting as a sturdy fourth leg to the financial planning table—working alongside the other three categories of trusted advisors.
Philanthropists should carefully examine the reasons behind their decision to share assets with the less fortunate or with deserving causes. With professional guidance or on their own, they need to address the following questions:
• What do I hope to achieve—for myself, my family, my business, my community and beyond—by being philanthropic?
• Which tools, techniques and strategies are most likely to help me achieve my goals?
• How do I successfully engage the rising generations in the family to help achieve shared goals—now and going forward?
• How do I evaluate my philanthropic efforts to know if they’re succeeding?
• How do I closely align the investment of philanthropic assets with family or organizational mission and values?
Charitable donations can change people’s lives—or even save them. Donations can preserve endangered species, feed the hungry, fight poverty, offer education and opportunity, encourage sustainability in a threatened world—and much more. They also can help bring a family or an organization together around shared values and goals.
Without careful planning, however, charitable donations can be ineffectual. Most successful individuals pay close attention and devote considerable time planning their investments in the stock market or their businesses. Successful and fulfilled donors will pay equally close attention to their philanthropic plans.
Endnotes
1. Telephone conversation between Bruce DeBoskey and Clara Miller (Jan. 14, 2016).
2. See www.federalregister.gov/documents/2016/04/25/2016-09396/examples-of-program-related-investments.
3. Conversation between Bruce DeBoskey and Donna Hall (July 10, 2012).
4. “A Million Ways to Save the World,” O, The Oprah Magazine (July 2007).
5. www.facebook.com/notes/mark-zuckerberg/a-letter-to-our-daughter/10153375081581634/.
