Simpsons Solicitors

Peculiar Philanthropy – 4. The broader spectrum of financial arrangements

January 5th 2014

One of the distinguishing features of philanthropic finance, when compared to business, is, of course, that charitable donations can form all or part of the funding arrangements.  The tax deduction is simple and attractive.  It is part of what drives traditional philanthropy.

One of the other distinguishing features is that philanthropy also supports organisations that have something other than a financial return to offer – the knowledge that good is being done, that lives are being saved, that misery and suffering are being alleviated.  People give time and money because they want to help and it makes them feel good about themselves.

This is of course the larger part of what drives philanthropy generally. It is also is what allows a broader range of financial arrangements to be considered.

At one end of the spectrum sits traditional philanthropic financing – donations in which the usual expectation is a risk-free and known tax deduction.  At this end, the goals are wholly charitable.  It’s about addressing social inequality and other failures. There is usually market failure in that the services being offered (e.g providing food to the homeless) cannot be paid for in a way that would make the organisation self-sustaining.

At the other end sits traditional business financing – investments in which the usual expectation is a market trade off between risk and financial return on that investment.  At this end, the goals are purely financial (higher profits) and built around what people are prepared to pay for goods or services.  It’s about capitalism and consumerism.  The organisation is self funding.  There are a myriad of financial instruments available to support such organisations – equity investments, loans and guarantees.

But there is a growing space in-between these two extremes; for businesses that have both profit and social good goals and for charities that can turn profits.  It is the value of social good that is becoming a financial commodity.  Social good can be a measurable return on investment.

We’ve seen it already to some degree with the environmental movement – people are prepared to pay a premium to be assured that they are not harming (and sometimes even helping) the environment.   Consumers are addressing a market failure by paying more and being rewarded with good will.

We saw this unfolding in three ways:

  • consumer demand for social good enabling business models and market forces to provide financial support for organisations with social goals (charities becoming businesses with social goals);
  • businesses choosing to have a social goal (whether primary or ancillary) (businesses developing charitable goals);
  • the middle ground of opportunities for financial supporters of organisations with social goals that are not yet self-sustaining to balance increased risk and lower returns with measurable social good in a way that is more attractive than a simple tax deduction.

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We heard a lot about ‘social impact investing’ that inhabits this inter-tidal land between traditional investment and charity.

We saw RSF Social Finance talk about how they were prepared to take a high risk on loans and investments if coupled with clear social good.  They financed an organic food distributor that had been turned down by the banks.  They took a high rate of interest (higher than the banks) but nevertheless took a risk the banks were not prepared to take.

We saw Kiva and their model of micro-lending and finance, match making small businesses in poorer countries with small lenders in wealthier ones – again a higher risk is acceptable to those lenders in return for the feelings of good will.  That said, the loan repayment rates was about 98%, significantly higher than for traditional bank models.

As one example, of novel finance models, we saw the Gates Foundation, eager to see an increase in distribution of vaccines in trouble areas, provide guarantees of sales to the pharmaceutical company that would enable more vaccines to be made and distributed at lower prices.

Its an emerging area with great potential.  Part of the issue is ascribing a financial value to social good – how much good should offset the alternatives of a tax deduction? Most investors are used to having clear and quantifiable goals and so measuring social good becomes more critical in this context.

The next and final in the series is Peculiar Philanthropy – 5. The Opportunities Arising From the Common Goal of Social Good.