Philanthropy is a traditional investment for many HNW and UNHW individuals in a diversified portfolio. However, similar investments, such as ESG and impact, may be taking shares away from that product. In a turbulent time for the while, are investors still philanthropic? Patrick Brusnahan investigates
So what is the state of philanthropy at the moment?
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Speaking to PBI, Russell Prior, head of philanthropy at HSBC Private Bank, says: “Over the last little while, say 12-18 months, we’ve definitely seen more activity from our clients on the philanthropy front.
“But equally that may or may not mean a huge amount because over the years I’ve been doing this, 15 years, I’ve seen interest in philanthropy ebb and flow in the short term. But what I do think we’ve seen going on is a longer-term positive trend in philanthropy that have been going on over the last 10 plus years.”
Harry Merrison, investment manager at Kingswood Group, adds: “A combination of public awareness, regulation and the imminent generational transfer of wealth are factors explaining the increased demand for both philanthropic giving and investment in environmental, social and governance (ESG) integrated solutions. People have a genuine desire to drive positive change.”
Our clients recognise that part of the benefit of having wealth is the ability to give back and to choose how and when they do this,” says Rebecca Constable, head of Kleinwort Hambros Newbury Office and head of philanthropy.
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By GlobalData“We have seen an increasing trend of clients doing exactly this – both in terms of financial giving but also giving of time and expertise for free and introducing others to worthwhile causes. There has always been a culture of giving but perhaps philanthropy has been associated in the past with the very rich.
“However, as wealth is being created at a younger age, with the new tech economies rapidly creating vast wealth, creating role models such as The Gates Foundation, Epic Movement and corporate culture embracing volunteering and donating, as a very important way of attracting and retaining strong talent, philanthropy has become more significant. It complements impact and ESG investing and Kleinwort Hambros embraces the latter as part of its responsible investment policy.”
Historically, philanthropy would be an investment for a certain kind of client, but the interest in it has expanded.
Prior explains: “Perhaps 10 plus years ago, philanthropy would probably have been seen as an activity for people in mid or later life or something that was being done as a legacy through their estate planning. Whereas if I fast forward to where we are today, then approaches to philanthropy cover a much broader range of people.
“We still see that midlife estate planning and legacy planning around philanthropy. But we’ve really seen a significant development in next gen philanthropy and in family philanthropy. This has emerged quickly over the last 10 to 15 years. And there are some differences between the attitudes of the next gen and the older generations.”
Philanthropy or ESG and impact?
While philanthropy is a wide range of products already, the emergence of environmental, social and governance (ESG) investment adds to that.
Demir Avigdor, market head for Africa and Europe, Standard Chartered Private Bank, tells PBI: “We are seeing an increase in investors moving away from traditional philanthropy to Environmental, Social and Governance (ESG) investing. Asset Managers are recognising that investing in ESG should not only be about improving societal outcomes but it’s also about better investment results. There is now ample evidence for the long-term outperformance of ESG strategies for clients.”
Constable believes that while similar, the two areas are distinct and with different goals.
She states: “Whilst related concepts, ESG and philanthropy have different goals. In respect of Philanthropy you are effectively paying to achieve an environmental or social outcome with usually no thought given to a financial benefit to yourself. ESG investors usually want to achieve a financial return for themselves together with a positive social outcome. The trends for both are positive and not mutually exclusive.”
Merrison purports that ESG is gaining interest, but it is not taking anything away from philanthropy.
He says: “The ever-increasing value of funds attributed to ESG linked investment strategies dominate headlines. With over £24 trillion in assets globally, an increase of 34% in just two years, it’s easy to think that philanthropy has taken the back seat. ESG investment and philanthropy should not be confused. Investing in companies with strong ESG scores is popular because those companies are better custodians of investor capital and offer greater long-term risk adjusted returns.
“Philanthropy is more akin to traditional charitable giving to drive positive societal change; change which can be mapped against the United Nations 17 Sustainable Development Goals (SDGs). The current Coronavirus pandemic illustrates how philanthropy empowers charities to deliver critical support to keep our communities thriving.”
“I think what we’re seeing is a broadening of the ways in which people, on a personal level, believe they can make a positive social impact,” Prior adds.
“Increasingly, we’re seeing this at a business level, just think about the way in which the sustainability movement has grown. There is a pressure now for responsible business behaviour that is helping to make it become increasingly mainstream. At an individual level people are realising that there are other ways you can also have a positive social impact through, for instance, your investment strategies. And that’s where things like ESG or even impact investing come through.
“But beyond that, I think people are seeing opportunities to have that positive social impact, through things like their personal expenditure. We’re seeing particularly in the younger generations, new approaches around things like social enterprise, or even social business. And of course, what many people are realising is you can do a combination of these things.”
Young philanthropists
The stereotype is the younger investor is more likely to give their money away to charitable cause or be more philanthropic. While there are some signs of this, it is hardly a set rule.
“The next gen have grown up in a digital world,” Prior states.
“They’ve grown up in a way more connected world, in a more networked world, where news stories about social needs and social issues, get around the world much more quickly. Because they’re users of that sort of technology, they engage and share it much more quickly. So they’re a much more action orientated group for the most part.
“Whilst the next gen don’t necessarily have the financial wherewithal to support their philanthropy, at this stage in their life, a lot more of their action and activity is around support, raising concerns, networking, activism, mobilisation and through volunteering. Where they can get on and do things for themselves well. We see quite a lot of younger entrepreneurial activity around social business, for instance, or social entrepreneurship.
“As they don’t necessarily have the financial wealth, we’re seeing a more hands-on approach towards how they can get involved in philanthropy. Whereas the more traditional philanthropist, deploying wealth accumulated over many years, is still prepared to deploy that wealth towards their philanthropic ambition, but may well be more likely to work in a more institutionalised manner.”
Constable agrees that it is usually people later in life putting actual money into philanthropy, but it is not a given in how they spend it.
She says: “The obvious answer to this is when they can afford to do so-and this used to be later on in life, or perhaps sadly after a life changing event.
“However, the UK is a nation of givers, perhaps more silent givers than in the USA, where it is expected if you are successful that you will give back to your university or the arts etc. There is a pattern emerging of more regular giving throughout lifetime to support worthwhile causes or areas of great interest, such as the arts, mainly driven by charities seeking regular givers.
“Therefore, younger philanthropists are emerging, and in the same way that individuals are encouraged to save, it is great to see donors are also encouraged to give, both in terms of matched fund raising, which can leverage the sum raised, but also giving of time and expertise, and volunteering.
“Philanthropy is a very personal experience so it is very difficult to find stereotypes. If you are thinking of the philanthropist who makes large financial donations followed by some active participation then perhaps there are some common traits, highly successful career and achieved significant status in their chosen field, desire to leave a legacy and a passion for a particular cause motivated by their own experiences. It may seem surprising but these individuals may not set ESG parameters for their personal investments.”
Prior concurs with regards to the UK and philanthropy. He recognises the country “certainly does have a tradition of it”.
However, Merrison finds that philanthropy is more accessible than ever.
He says: “You don’t have to be Bill and Miranda Gates to be a philanthropist. Just Giving was one of the first online platforms developed and since 2001 it has assisted a cross section of the global demographic raise in excess of £4bn ($4.9bn) for their chosen charities, with contributions as little as £1, making philanthropy available for the masses.”
Demand for return
Arguably, philanthropy is chosen out of the good of people’s hearts, but in private banking, there needs to be a return.
Are people turned away by the lack of return? Do they not mind? Or is philanthropy actually a worthwhile investment that pays dividends?
“There has been an increasing focus on the return on philanthropy over a number of years,” Prior explains.
“It’s what we would call the impact measurement debate. The measurement of impact is still a very imprecise concept. A lot of people are working really hard to make their impact more measurable making it clearer and more tangible, but it still remains quite a difficult thing to do.
“If you’re an individual philanthropist, then it can be very hard to get that sort of impact assessment. What we focus on at HSBC Private Banking is really understanding why a philanthropist is motivated to do philanthropic works. And what we try to do is to ensure wherever we can, that the motivation that lies behind their philanthropy is being fulfilled. If we can do this for the philanthropic works they undertake, their purpose or their motivation is being met.”
Constable adds: “Typically donors give altruistically, for the benefit of others. The pressure from the recipient is in terms of demonstrating the impact, sustainability or possibly scalability of the donation (matched funding etc) . If a donor is seeking some form of return financially, for the ‘investment’ rather than gift made, then this is where impact investment or responsible investment is more relevant.
“The idea here is that the investor seeks to deploy capital in an investment that may have environmental or social benefits but it is not a gift and there is some measure of financial return. Impact investments are gaining popularity but not at the expense of outright donations. The two are different.”
Merrison agrees: “The principle driver for those making donations is philanthropic rather than for profit.
“There are however attractive tax benefits to note. From a strategic inheritance tax (IHT) mitigation perspective, charitable gifts of 10% of the net estate can reduce the effective rate of IHT from 40% to 36% combining succession planning with benevolence. Charitable donations may also qualify for Gift Aid, a mutually beneficial scheme allowing UK based charities to reclaim the donor’s basic-rate tax already paid from HMRC. The donor can also claim back any tax paid at the higher rate.”
Is Covid-19 the time for philanthropy?
When are customers more likely to invest in philanthropy? Is it in the good times when there is more capital?
Or is it when, such as during the time of the Covid-19 pandemic, when it appears as if people need it more?
Prior concludes: “I think what we’re seeing at the moment – in a time of difficulty, a national emergency – is a very broad and significant philanthropic response.
“In very difficult times like this, we undoubtedly see a lot of philanthropy.
“We are seeing strategic philanthropists changing the focus of their giving towards this emergency.
“We’re seeing businesses change their operations to provide direct support. And we’re seeing many of our fellow citizens offering help to their neighbours and to the communities in which we live.”
