The decision of the IFC Economic Report to focus on topic of philanthropy and social good is extremely apt. It is vital that those working in IFCs are aware of the growth in this area and are able to respond to growing client demand. As we approach the 2020s, the rise of philanthropy, social impact, and social good, in both common discussion and future planning amongst wealth holders, shows no sign of abating.
An Age of Philanthropy?
Led from the very top of the wealth pyramid, initiatives such as the Giving Pledge, championed in 2010 by the then world’s richest man, Bill Gates, have proactively encouraged public commitments to ‘good causes’. The initiative now counts over 190 billionaires among its members worldwide, with 22 countries represented by pledgers. Whilst not legally binding, signatories are encouraged to ensure at least 50 per cent of their wealth is committed to good causes during their lifetimes or upon death.[i]
Whilst some have claimed we are merely witnessing a new, transient ‘golden age’ of philanthropy amongst the gilded elite, similar to that of the early 1900s (Carnegie et al), it is clear to me that this trend instead reflects a wider change of attitude within society.
Firstly, this tendency is a not purely restricted to the very richest in society. A 2019 UBS-funded study which surveyed over 260,000 foundations in 39 countries[ii], found that over 90 per cent reported assets of less than US$10m, with nearly half under US$1m. Whilst only a partial study of global philanthropy, such statistics certainly indicate that philanthropy is spreading beyond its traditional sphere. It is important to acknowledge that philanthropy in society is not new; examples can be found throughout history, from ancient Rome to the Rockefellers. Despite this, modern growth of the sector has been exceptional; 75 per cent of the 260,000 foundations mentioned above were created in the last 25 years.
Why Do People Engage in Philanthropy?
Alongside this growth in philanthropy, the rising demand for, and role of, wider ‘social good’ in the creation of capital suggests this paradigm shift. Growing numbers of high net worth individuals (HNWIs) and corporations are no longer content to divide the methods of generating wealth from the celebration of donating excess. The rise of environmental, social and governance (ESG) requirements, Impact Investing (valuing social and financial returns equally) and issue-led consumer choice campaigns all evidence the changing approach to social responsibility in society.
The UN-backed Principles for Responsible Investment (PRI), launched in 2006 to encourage investment companies to commit to incorporating ESG issues into their investment decisions, was phenomenally successful. By April 2018, the number of signatories had reached 1,715, representing US$81.7 trillion assets under management.[iii]
260,000 Foundations in 39 countries have assets exceeding US$1.5 trillion.[iv]
The latest figures from the Global Impact Investors Network estimate Impact Investment assets under management at US$502bn at the end of 2018.[v]
Investment companies representing US$81.7 trillion have signed up to the Principles for Responsible Investment.
The popularity of such initiatives is not solely driven by a sense of altruism, however. The PRI also claims that ESG factors play a “material role in determining risk and return”, highlighting the momentum generated by “beneficiaries becoming increasingly active and demanding transparency about where and when their money is being invested”[vi].
In order to adapt to these changing priorities in the wealth management arena, it is important to understand the motivations that is driving this sector toward social impact.
We know the motivations of every individual differ, but common themes often emerge; oft quoted examples include the desire to create legacy, whilst establishing or continuing a sense of family purpose around shared values. The role of philanthropy in helping to educate and ground children is a repeated mantra, whilst a sense of guilt or gratitude for the individual’s own good fortune is also a familiar public explanation.
These sit alongside less loudly shared motivations, including altruistic religious beliefs, or a more self-interested desire to benefit through expanding networks, increased visibility, and unique experiences. Lastly, it is important not to overlook growing societal pressures, the expectations of others and the power of questioning from young generations.
To be clear, in my experience, philanthropists are not initially motivated by tax incentives. Often the opportunity to do good has been triggered by a liquidity moment, at which point tax systems mean that one may as well give more to their chosen cause. Nevertheless, tax is rarely, if ever, the major initial driver. That said, once engaged with a philanthropic or social-good mindset, philanthropists are keen to maximise tax advantages, less for personal benefit than to increase available philanthropic funds. As such, we see clients looking to make donations, loans or investments with a view to gaining social impact first, and financial benefit second.
The Role of IFCs.
Almost all our clients at Boncerto are international in their giving and issue-focused (children, modern day slavery, or wildlife, for example) rather than limited by geography. Often they will be running two or more giving programmes, which allow them to have separate funds, targeting differing aims and objectives, and allowing for family members to follow their own interests. A common structure, for instance, is one which allows for a small degree of local, discretionary giving to run alongside the larger issue focus. In this way, our clients are able to respond to local need and play a role in their local circles (often through support for the arts, local clubs or friends’ fundraisers), while maintaining a unifying objective to the family philanthropy.
The international nature of this philanthropy has never been more important, building links, networks, reflecting a more globalised world, and helping to break down barriers. In this international environment, offshore International Financial Centres (IFCs) have a crucial role to play. To greater and lesser extents, all IFCs act as neutral holders of trust, guaranteeing independence of action whilst enabling seamless, multinational wealth management. These services are as valuable to philanthropists as to other international actors. Indeed, certain elements of IFCs, such as the ability to remain a protective level of anonymity, can prove to be of particular benefit to philanthropists. Examples, such as the recent Hungarian backlash against George Soros and his support of several liberal causes in the region, provide sobering food for thought to philanthropists looking to operate in hostile environments.
In the future, the role of IFCs in philanthropy could, and should, become more valuable. As trust in government, and trust in philanthropists / philanthropy is lowering, just as philanthropy itself begins to increase, IFCs could prove vital to the continued development of the sector.
Large scale philanthropy often comes with a lack of accountability and democratic control. Issues are decided by the wealthy and are often seen as merely an extension of that individual’s influence, or prejudice. Even away from support of contentious issues (such as anti-LGBT causes or campaigns against birth control), philanthropists wield a great deal of power and influence through their ability to turn funding on and off. Seen through a negative lens, this reliance on the whims of philanthropists and their personal situations, is a major challenge. However, while philanthropy is not perfect, it is often more flexible, nimble and able to take risks than Government aid. It can act as risk capital for ideas and solutions that change the world, and directly save lives; and, in this way, is essential for progress.
In this environment, independent, neutral holders of capital, in the form of IFCs, could have a massive positive story and impact. However, the truth is that instead, there are reputational risks for philanthropists or charities, in being based at IFCs.
The greatest of these is the fact that, due to on-going issues and high- profile press stories, such as the Paradise or Panama Papers, IFCs are still seen by some in an extremely negative light. Generally, the public perceives IFCs as a way to ‘game the system’, in order to avoid paying dues to national governments and systems, benefitting the elite by minimising tax and increasing inequality.
For every good news story being shared, it seems there are 10 negative ones waiting to appear. To an individual philanthropist, wary of personal or business reputational risk, or to charities looking to raise funds from the public, the risk of being associated with this is significant. In light of this, IFCs need to start telling a coherent story about the specific benefits they can offer philanthropy. It is the role of advisors to share this message with a wider public, for whom the mainstream message is negative.
One such story can be found in the role of IFCs in the successful long-term growth of not-for-profits. Removed from varying national rules on disbursement (such as the requirement for private foundations to give away 5 per cent of assets annually in the US), or tax burdens for doing business, not-for-profit entities can grow to a large enough scale to have a truly global impact. Likewise, through the use of IFCs, not-for-profits and individuals can look to raise further funds outside of (or often in spite of) domestic political pressures.
Alongside the collation and growth of funds, IFCs can also enable wider disbursement and impact, both geographically and across issues. IFCs can often allow the support of causes across countries that are politically opposed, for example. Protection from unilateral decisions (such as the recent Saudi and Canada asset freeze) can enable donors to continue to support projects. And IFCs are often unrestricted by historical, societal or religious nation-state ideals of what is charitable, enabling the support of that which may not be deemed charitable within certain countries (for example, the support of sport in Canada), without losing the ability to remain a charitable entity.
Lastly, and potentially of most value, is the role of the trustee in providing independent oversight of the not-for-profit and ensuring its adherence to long-term goals. Common offshore structures can restrict the influence of day-to-day changes, protecting the designated funding from divorces, family disagreement, or generational loss of focus and ensuring that not-for-profits stay the course.
Positive Opportunities and Pressing Challenges
Overall, there are both positive opportunities and pressing challenges ahead for IFCs, and those working within them. Private wealth clients have already begun to expect more from their wealth planners and solutions-providers, and want them to share in their ambitions and wider life goals. I have used a number of terms interchangeably in this article, from social impact to social-led, and social good; this reflects the language of our clients, who no longer see their impact or legacy as limited to one, demarcated aspect of their portfolio or actions. To satisfy these clients will require a more flexible approach to what was previously the rigorously divided areas of investment and philanthropy. It will also require partnerships across new expertise areas, reflective of the current networks built in traditional areas between lawyers, wealth planners and fiduciary agents. Unsurprisingly, this is something we at Boncerto, are keen to see grow – not only from our own self-interest, but to help our clients make a real difference globally.
[ii] Global Philanthropy Report, Perspectives on the global foundation sector, Paula D. Johnson, Harvard Kennedy Business School, Hauser Institute, 2019, Funded by UBS https://www.ubs.com/global/en/wealth-management/uhnw/philanthropy/shaping-philanthropy.html
[iv] Global Philanthropy Report, Harvard Kennedy, as above.
[v] Global Impact Investors Network (GIIN) press release March 2019, Courtesy of Barrons, Impact Investments under management total $502 billion, Abby Schultz, https://www.barrons.com/articles/impact-investments-under-management-total-504-billion-01554145026
[vi] Principles for Responsible Investment – what is responsible investment? https://www.unpri.org/pri/what-is-responsible-investment
Peter Cafferkey Peter Cafferkey is the CEO and Founder of Boncerto Ltd, based in London. He has worked in the philanthropic and impact investing space for over a decade and provides guidance and support to individuals, corporations and foundations looking to engage in the next generation of philanthropy, CSR, and impact investing. Previously, he was a Director at Geneva Global and International Manager at the Charities Aid Foundation. Peter has been profiled in the Financial Times and regularly speaks on impact investment at conferences around the world.