SUMMARY
The worlds of investment and philanthropy are moving closer together. Taking an investment-focused approach represents an opportunity for philanthropy to play a key role in addressing 21st century challenges, while seeking to unlock additional assets for social impact.
In times of difficulty, such as climate-related emergencies, conflict, or health crises, philanthropy is often called upon to help alleviate suffering and rebuild communities. And as macroeconomic headwinds intensify, the support of philanthropists will be in strong demand.
Yet, during times of recession, donors often become more cautious, paring back their charitable giving*. As such, a new Citi Global Perspectives & Solutions report, Philanthropy and the Global Economy v2.0: Reinventing Giving in Challenging Times, asks how philanthropy can unlock more funding for non-profits, even when giving is under pressure.
Integrating philanthropy and investment
According to the report’s authors, one way to deliver greater impact could be to encourage more integration between philanthropy and investment. The two are often viewed as distinct, unrelated pursuits*. Yet this misconception “may be the result of a myth that impact investing does not deliver financial returns.”
Investment |
Philanthropy |
|||
|---|---|---|---|---|
Traditional investing |
Responsible investing |
Impact-led |
Concessional capital |
Grantmaking |
Not considering the impact of investments |
Integrating impact considerations into investment decisions |
Providing capital to projects seeking positive impact with market-rate returns |
Accepting sub-market returns as a trade-off for social impact |
Providing capital to projects that generate no financial return |
Source: Citi GPS
Fortunately, this thinking is becoming a thing of the past. In the report*, Harlin Singh Urofsky, Global Head of Sustainable Investing, Citi Private Bank, explains: “Families and high net worth individuals increasingly see philanthropy and investing as complementary to one another and to their objectives.”
Karen Kardos, Head of Philanthropic Advisory, Citi Private Bank, adds: “It’s not siloed anymore. The two are very much intertwined with the shared goal to create positive impact for the common good.”
Connecting the dots
As outlined in the report*, greater integration between philanthropy and investment could further increase the contribution of philanthropy to the global economy in two ways:
Negative screening |
Stewardship & engagement |
Values-aligned investments |
Mission-aligned investments |
|---|---|---|---|
Excluding specific industries or companies from investment portfolios, especially those that are considered counter-productive to the aims of a charity - for example, health charities halting investment in tobacco companies. |
Engaging with investee companies through well-known strategies including active voting, conversations with management, and shareholder resolutions - for example, poverty alleviation organizations discussing living wage payments with investee companies. |
Including a philanthropist's values in making investment decisions - for example, diversity, equity and inclusion or sustainability considerations. This could include investing in women-led funds or with a gender lens for a philanthropist working on gender equality. |
Making investment decisions to advance a philanthropist's mission directly - for example, including a focus on education in an investment strategy if that is a focus in the philanthropist's grant-making strategy. |
Source: Citi GPS
The non-profit sector has far more resources available to it than just the $550 billion donated globally each year. In fact, the total value of assets held by the philanthropy sector is conservatively estimated at $2.4 trillion – more than four times the value of donations*. And there are several approaches that could help non-profits grow their impact by deploying more of these assets.
At one end of the spectrum is negative screening, which excludes specific companies and industries from non-profits’ investment portfolios, especially those that might be considered harmful to an organization’s philanthropic mission.*
Then there is stewardship, through which non-profits engage with investee companies using well-known strategies, like active voting and shareholder resolutions, to urge them to tackle the issues that philanthropy’s grantmaking seeks to address.*
Beyond excluding particular sectors or engaging with companies on its priority issues, philanthropy can also help to build solutions to the challenges of the 21st century. Popular strategies here are value-aligned investing (e.g. investing in women- or minority-led businesses) and mission-aligned investing (e.g. backing companies building technologies for climate change mitigation).
“When we think about investments, foundations can use more than just their philanthropic assets to move the needle,” explains Karen Kardos. “It can go beyond the endowment to the ‘lifestyle’ of the private foundation.”
Harlin Singh adds: “We have a foundation for whom diversity, equity and inclusion is a focus area. They decided not to transition their investments to ESG or impact strategies, but they did evaluate how diverse their investment managers were.”
That’s a point of influence, she notes. “When you have a foundation with a significant amount of assets asking why the team is not diverse, it could change the landscape of the entire industry.”
This might involve sharing philanthropy’s expertise and investing strategically to catalyze private sector investment.
As the report* details: By strategically deploying its charitable assets, philanthropy can route further investment capital towards the causes it supports – thereby growing the impact of its own funds.” The authors highlight five ways this could be accomplished:
Seeding: Providing capital to early-stage ventures that are not yet commercially viable but might become profitable in the future.
Scaling: Providing capital to grow established, commercial models into new locations or distinct client bases that present both challenges and an opportunity for impact.
Sustaining: Accepting below-market returns on an ongoing basis to support models and platforms that will never be commercially viable.
Paying for success: Paying for positive outcomes (e.g. ‘success payments’) after investors finance the upfront costs of an impactful program.
Sharing expertise: Deploying the sector’s collaborative power and expertise to foster partnerships with public and private sectors.
Kardos elaborates: “I see this as a two-step process ¬– first, philanthropy can take risks and look at moonshots. For example, philanthropists can provide seed funding for a start-up or fund social entrepreneurs. Whether it’s a grant or an investment, philanthropy can work lockstep with its partner organizations to learn and course-correct. This could really lead to scaling innovative ideas.
Second is philanthropy’s superpowers of convening and collaborating with both the private and public sectors. Philanthropists want to be connected. They want to learn from like-minded funders and co-investment opportunities can provide funding for true innovation at a larger scale.”
Overcoming barriers to change
Of course, bringing philanthropy and investment together will not be without its challenges. A lack of a common language between the two fields is a notable roadblock – though the report* outlines a taxonomy to improve communication.
And wealth managers could also play a role in bringing philanthropists and investors onto the same page. As Singh concludes, “The desire to drive change is absolutely there. It’s a matter of connecting the dots.”
Discover more about the benefits of integrating philanthropy and investing by reading the full report.
