PART ONE OF A FOUR-PART SERIES
19 November 2020
Advocates of impact investing now routinely use a version of the Spectrum of Capital (see diagram) to describe how investment capital can be deployed, from traditional investing (on the left) to philanthropy (on the right). As you move from left to right, you add more intention to avoid harm, more effort to benefit
society, more focus on providing solutions, as well as more scrutiny on measurement.
The diagram shows that impact investing and philanthropy share the aspiration to actively contribute to solutions, on a continuum from competitive risk-adjusted financial returns, moving to lower than market returns, falling to partial capital preservation, and then to full loss of capital at the rightmost end, which is traditional philanthropy, let’s call it Philanthropy 1.0.
The investing world is steadily moving to the right, as professional investors abandon the traditional notion that investing should take no note of negative
impacts on society and the environment. Mainstream investing is now actively seeking to avoid or reduce harm, and increasingly has the ambition to benefit
stakeholders. Some asset owners now even insist that their investments contribute to solutions, at least for a portion of their portfolio. Less noticed is that philanthropy is also evolving, but to the left — becoming more like investing, as it accepts the notion that it, too, represents a deployment of capital, even if the financial return expectations are different. So, as investing becomes more valuesoriented, philanthropy is becoming more disciplined and professional. The
two worlds, historically separate, are converging into values-based, disciplined investing.
This new version of philanthropy, let’s call it Philanthropy 2.0, shares with the investing craft a commitment to careful research of potential “investments”, looking at the charity’s people, process, governance and track record. It measures the outcomes and impact generated, and assesses the success of the strategy by those outcomes, not by the amount of money invested. And it assesses and manages the risk that the intervention will generate no outcomes, or even negative outcomes. In fact, this type of investment discipline has long been exercised by well-resourced grant-making foundations. But as has happened with investing, this level of
discipline should be exercised by all serious philanthropists.
Once you start to look at philanthropy as a form of investment, some questions suggest themselves:
• Should philanthropists be using a professional advisor, as they do for their other investments?
• Why aren’t more financial advisors trained in the disciplines of philanthropic investment?
• Why invest for good in philanthropic investments, but not in one’s other investment pools, especially in endowment pools or Donor-Advised Funds?
• There is a big gap between a market return, a lower-than-market return and return of capital (i.e. a 0% return) on the one hand, and a minus 100% return on the other (i.e. the typical financial return on donations). Why isn’t more done in that space between 0% and minus 100%?
• If impact investors are providing capital to create solutions, how can philanthropic capital be deployed in a complementary way, rather than competing? What special capabilities does philanthropic capital have that market capital does not? (Hint: higher-risk areas that cannot sustain a market return, or blended finance
structures to support the crowding in of market capital.) Philanthropy 2.0 calls for us to stop donating to causes and start investing in causes. Not as a metaphor, but for real — using the knowledge, techniques and discipline that conventional investing has developed over several generations. The most admired conventional investors are not those who manage the most money, but those who generate the highest risk-adjusted returns for the money they manage. Similarly, some day, the most admired philanthropists will not be those who spend the most money, but those who achieve the greatest impact with the resources at their disposal.