Responsible Future

Better together – aligning investment and philanthropic capital allocation

Christoph Courth Head of Philanthropy Services and Rosa Sangiorgio Head of ESG, Pictet Wealth Management

Better together – Aligning investment and philanthropic capital allocation

Historically, investing and giving have been considered two distinct and unconnected endeavours. However, when the two are done in tandem, they can become exponentially more powerful in the realisation of a social or environmental vision. 

Impact investing, which targets positive environmental and/or social outcomes in addition to financial returns, is now mainstream, with a plenitude of options and providers available to private investors today. However, despite the natural relationship between philanthropy and impact investing, non-profit organisations and philanthropists are far from universally aligning their investment portfolios with their visions. 

The private capital continuum

In the past, private investment portfolios were solely dedicated to achieving financial returns and philanthropic capital only on financial distributions to charitable causes. Now there is growing awareness of the various opportunities along the continuum that exists between the two, from more ESG-connected investing to more innovative forms of philanthropy. 

Investment options broadly categorised

Where until now there has been a lack of consistency in the way responsible investing has been described, labelled and categorised, the EU has made a first push toward an agreed framework as part of its Sustainable Finance Disclosure Regulation initiative. Since March, all European-based wealth and asset managers as well as any marketing products and services for distribution in Europe, must categorise their investment solutions into four categories, two of which fall under the responsible investing umbrella. 

"Responsible investing is not a replacement for philanthropy, but rather a complement to it."

Non-ESG investing : Starting on the left of the capital continuum, non-ESG investment solutions have historically made up the majority of investment products. They are ‘non-ESG’ because do they do not consider environmental, social or governance (ESG) characteristics in the securities selection process. 

ESG-integrated investing: Integrating ESG factors into the investment process is becoming a minimum standard in building a resilient portfolio. The portfolio manager is neither bound to exclude those with poor ESG characteristics, nor favour securities with positive ESG characteristics. Rather, ESG attributes contribute to a comprehensive due diligence process. 

ESG-binding investing: Falling within the EU’s definition of Responsible Investing classification, ESG-binding portfolios consider sustainability risks and promote social and environmental characteristics. ESG characteristics have an impact on investment decisions, with portfolio managers choosing investments that are either already well positioned from an ESG perspective, or where active engagement with the underlying companies or institutions could support improvement of those metrics. This engagement can be done through proxy voting, cooperative shareholder interventions and bilateral dialogue with management or leaders.

Positive impact investing: Investment solutions with a clear objective to create a positive impact on society and the environment fall on the far right of the responsible investing continuum, closest to philanthropy. While these investments do seek financial returns, they also seek to create positive change and solutions to today’s most pressing needs. Examples could be investments in companies combatting climate change or in debt being raised to fund schools in developing countries. 

Philanthropic Capital – Impact first 

Moving into the giving side of the continuum, philanthropic capital does not directly seek a financial return but pursues positive social and/or environmental impact exclusively. While investing can and does offer a vehicle for influencing and effecting positive change, not all areas are investable. Indeed, under some circumstances, short-term financial outlays may be necessary to attain desirable longterm outcomes. Investment capital may also not be ideal for every project stage. For example, grant funding may be more appropriate for funding a project when risks are unknown or too high for market investors. In such cases, there is also the option of using blended finance, which puts both philanthropic and investor capital to work together. Therefore, responsible investing is not a replacement for philanthropy, but rather a complement to it. 

Philanthropists can employ one or more methods in pursuit of their specific goals. 

Charitable Giving: The starting point in many giving journeys and at the far right of the capital continuum, charitable giving involves grant and donation giving to non-profit organisations. It is typically quite hands off, with minimal long-term strategy. 

Philanthropy : Applying a more structured and strategic approach to giving, philanthropy has an end goal and the majority of grants or programme-related financial commitments are aligned with that goal. 

Catalytic Philanthropy : When endeavouring to change an entire system, rather than address a single issue, catalytic philanthropy is deployed. It requires a clear strategy and end goal and involves leveraging all available resources toward its realisation. Venture philanthropy would fall under catalytic philanthropy. 

"With total global investments estimated at USD 300tn, a mere 1% shift towards positive impact investments would cover the outstanding funding gap required to achieve the UN Sustainable Development Goals."

Social Finance : Closest to investing on the giving spectrum, social finance adapts investment models to social and environmental causes. Approaches include pay for success models like social or development impact bonds, providing low/no interest loans, or even taking equity in a social enterprise. 

‘Individually we are one drop, together we are an ocean.’ How can philanthropy help advance impact investing?

With total global investments estimated at USD 300tn, a mere 1% shift towards positive impact investments would cover the outstanding funding gap required to achieve the UN Sustainable Development Goals [1] . And when it comes to measuring impact, philanthropic organisations in many instances are the perfect partners to support impact investors towards best practices. 

What if, rather than allocating only 1–5% of capital per year in pursuit of their missions, philanthropists and charitable foundations leveraged the entirety of their assets (including retained assets, endowment and staff pension funds) through responsible investing opportunities? 

With the size of the impact investment market growing by 42% in 2020 [2] , alongside the belief by 79% [3] of millennials that societal causes are more important than wealth accumulation in defining their legacy, the singular focus of philanthropists and investors will likely become ever less, as more choose to leverage their full capabilities on the capital continuum to achieve the outcomes they wish to see in the world.

[1] There is an estimated USD 2.5trn shortfall per year of investment funding required to realise the Sustainable Development Goals. 

[2] Source: Global Impact Investing Network (GIIN) 2020 Annual Impact Investor Survey.

[3] Source: The Economist. ‘The New Face of Wealth’ 2018.

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