research & design for philanthropy
Blueprint is pleased to launch the first annual industry-wide analysis for giving and social investing! Blueprint 2010 answers questions such as:
-Whither giving in 2010?
-Which innovations should I understand and which are just buzzwords?
-What are the key policy issues that might influence philanthropy?
-What wildcard events will matter and what should I be on the lookout for?
“Disrupting Philanthropy: The Future of Technology and the Social Sector” L. Bernholz, E. Skloot, B. Varela. (November 2009).
There is an old trope in philanthropy that when you’ve seen one foundation, you’ve seen one foundation. It is a statement that reflects both the diversity of philanthropic approaches and the lack of standard practice. In the subfield of impact investing, this diversity manifests itself in the tower of terms illustrated by this diagram from the Monitor Institute’s report on impact investing :
To avoid addressing the merits of every term that has ever been coined in every report that we have identified, we focus our attention instead on the definitions of a few key terms in the context of sensible, conceptual frameworks to help us set the stage for the #wcwhen conversation.
To start, let’s begin with Jed Emerson’s concept of Total Foundation Asset Management. In his essay, Emerson suggests that there are five philanthropic asset classes: grant assets, intellectual assets, human assets, political assets, and financial assets. For example, a foundation’s political assets may refer to its ability to convene stakeholders around an issue, whereas a foundation’s intellectual assets may refer to the knowledge and expertise around a specific issue area .
If we define capital broadly to include all of the five “asset classes” referred to above, the question of #wcwhen becomes more complicated. Instead of deciding among three different types of financial capital, which in this context refers to both grants and investments, a more inclusive term of capital would force us to evaluate all other options for deploying resources available to foundations. While answering such a question would ultimately help foundations deploy all of their assets more strategically and may be a critical question that foundations need to ask themselves, it is beyond the scope of our conversation here.
Let us turn our attention instead to the “spectrum” of financial investments commonly referred to in reports about mission investing. In the Apture embed below, we cover some of the various frameworks and visualizations that have been developed in the mission investing literature:
There are a couple of important points to note here. First, there are different ways of categorizing the different types of financial assets foundations possess. At the most basic level, there is a foundation’s endowment. From the endowment, a foundation can make traditional investments (which seek a market-rate of return) and mission-related investments (which often, but not always seek market rates of return). From the grants budget (calculated off of the returns earned on the endowment), a foundation can make traditional grants (which have a -100% financial rate of return) and program-related investments (which often, but not always seek below-market rates of return). However, some firms also categorize foundation financial assets by their rate of return and not necessarily by their type of investment, as FSG Social Impact Advisors does in the graphic above.
The reason this distinction matters is that we have two different types of categorizations for labeling philanthropic capital, one by the type of investment (traditional investment, mission-related investment, program-related investment, and grant) which is largely defined by the investment’s source of capital (endowment or grants budget) and one by the financial return on investment (no return, below market-rate of return, and market-rate of return). The categorization that is more useful to our discussion is the latter, which I’ll explain why with an example. Imagine you are comparing two different ways of providing capital to a for-profit microfinance organization like CompartamosBanco: a below-market rate loan and a market-rate equity investment. Technically, in either case, a foundation could use a program-related investment (PRI) or a mission-related investment (MRI). Thus, it’s not the type of investment that makes these two options different, but the financial rate of return each investment seeks and also the type of capital (debt or equity).
It is also important to note that many of the diagrams imply a direct tradeoff between social return and financial return that may not be this simple. For example, in the Spectrum of Foundation Investments by FSG Social Impact Advisors, the diagram implies that the charitable objectives diminish as one moves along the axis of negative 100% expected financial return to market-rate expected financial return. Similarly, Acumen Fund’s A Spectrum of Capital suggests that impact investors and traditional philanthropy, because of their greater focus on impact, necessarily seek reduced financial return. Isn’t it possible that an investment in Google could create as much impact in improving access to information as a grant to Wikipedia? Or that an investment in Better World Books might create as much impact in child literacy as a grant to Room to Read? The question of which type of capital creates more impact depends on a deeper analysis of the situational circumstances – and the whole question of social metrics – that don’t seem to be totally dependent on how much return the capital seeks.
To help visualize the issue, we at Blueprint developed the following diagram of three graphs that correspond to three different situations. Graph A represents a situation when grants would be most effective for creating impact, Graph B a situation where below-market rate investments would be most effective, and Graph C a situation where market-rate investments would be most effective. The trick is understanding for any given field or any given organization, which graph, among these or others, applies. If you’re interested in maximizing impact in the field of microfinance, does the field look like Graph A (grants), Graph B (below-market rate investments), or Graph C (market-rate investments)? What about the field of digital media and learning? Or what if you’re not looking to support an entire field, but a particular organization?
What do you think of the diagrams above? Does this distinction between grants, below-market rate investments, and market-rate investments matter? How is the analysis helpful and where do we go wrong? Is there an example when you or your organization has evaluated different types of funding options and came to a strategic decision?
Stay tuned for our next post, which will be on frameworks for calculating the potential impact of grants, below-market rate investments, and market-rate investments – in particular looking at Acumen Fund’s BACO methodology – and introducing the distinction between organizational-level and field-level analysis of financial options.
The New America Foundation is pleased to announce the appointment of the first HAND Foundation Philanthropy Fellow, Dr. Lucy Bernholz. With the generous support of The HAND Foundation, based in Redwood City, Dr. Bernholz will analyze key trends in the philanthropy sector, with a focus on the reforms and regulations that will determine its future.
“The face of philanthropy has changed dramatically in the last several decades and will evolve more significantly in the coming years. As more and more people look to philanthropy to solve the biggest problems facing humanity today, a nuanced understanding of the philanthropic landscape, trends, and possibilities is needed,” said Noosheen Hashemi, President and Co-Founder of the HAND Foundation. “The HAND Foundation shares Lucy’s commitment to furthering scholarship on the social economy and is hopeful that this fellowship enables a deeper and wider public discourse.”
“Lucy is a keen observer of the philanthropy field and we are excited to embark on this new collaboration with the HAND Foundation,” said Leif Wellington Haase, Director of the California Program at the New America Foundation. “California is home to some of the largest philanthropic organizations in the country, as well as the most dynamic younger donors. We feel this is the perfect time to join the conversation in this area.”
Please contact Elizabeth Wu with press inquiries at (510) 295-9859 or wu@newamerica.net.
