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Philanthropy: A poor use of capital

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  • Philanthropy: A poor use of capital

TBLI Group founder Robert Rubinstein explains how much so-called philanthropy is merely a showcase for egotists.

Fifty-eight US billionaires have pledged at least 50% of their wealth to charity through a campaign started by investor Warren Buffett and Microsoft founder Bill Gates. The Giving Pledge is an effort to invite the wealthiest individuals and families in America to commit to giving the majority of their wealth to the philanthropic causes and charitable organisations of their choice - either during their lifetime or after their death. The same effort is underway in Europe to get wealthy individuals to give away half their fortunes before they die to charity.

I am against this 19th-century idea of Andrew Carnegie, but for a different reason than most of the European billionaires are using - they argue that the charitable work should be the work of government. My objection is mainly based on impact and effectiveness.
Traditional philanthropy takes the principal and invests the money to achieve only financial returns, and gives away 5% to maintain non-profit status. Few of these large endowments, family offices or individuals try to achieve financial returns as well as achieve a positive social and environmental impact (impact investing).

This traditional philanthropic route - namely give away 5%, which represents a portion of the interest, to charity - is a very poor use of capital. If the asset owner created a portfolio that achieved social, environmental, as well as financial returns, 100% of the money would be leveraged for society and the environment. In addition, if 5% of the returns were given away, the total leverage would be 105%. I don't know about you, but I learned that 105% is larger than 5%.

A majority of philanthropy is ego. People love to cut ribbons and see their names on buildings, wings and plaques. If people are driven by ego, that is fine, but I don't think the taxpayer should finance this. By shifting from interest to principal, we have greater impact and don't require a tax break to mobilise the money. In the US, federal tax law requires philanthropies to give away 5% of their total assets each year to maintain their non-profit status. In these days of tight budgets, it might not be such a bad idea if more money were invested in impact investing.

Fortunately, what we see happening is that several of the leading wealth managers are starting to offer impact investing products and services to their clients. This is much smarter, showing real impact and less ribbon cutting. And it is focused on proving that you can achieve financial returns as well as a social and environmental added value. If you ask anyone if they would like to achieve a financial as well as a social and environmental return, most would say "why would I be against it?"

If Warren, Bill and the other billionaires are listening, how about really leveraging money for the commons by doing impact investing, without tax subsidy and leveraging much more, without having to go around trying to convince people to give half their money away. As astute businessmen, I am surprised that after all these years, they are still doing the same low-impact PR approach. As Jerry Maguire said, "show me the money".

Robert Rubinstein is the founder of TBLI Group, which holds the annual TBLI Conference in Europe and ASIA.

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