Inside Philanthropy

A blog on philanthropy and nonprofit news and issues. A publication of Philanthropy Journal.

November 21, 2011

Philanthropy without borders emerging


By Todd Cohen

The players are shifting and the lines are blurring in the “social economy,” creating big challenges and opportunities for people who care about social change.

At stake is the way private assets will be used for public good, whether through charitable giving, “impact investing” in the capital markets, or political advocacy and policy work.

Social investors increasingly are focusing assets on what they believe will be the most effective strategy for helping people and places in need, and are looking for results and not worrying about which sector an effective social-change organization happens to occupy.

The challenge for charities is to make sure that they not only are effective but also can help make investors’ assets more productive by teaming with other organizations, regardless of sector.

Those critical issues were addressed recently at a Children’s Investment Summit in Charlotte, N.C., by Lucy Bernholz, managing director of Arabella Philanthropic Investment Advisors.

“The way we make change happen has expanded, diversified,” Bernholz told about 50 funders and children’s advocates at the event, which was organized by the Council for Children’s Rights.

Social investing

Building on the traditional investment of individual donors, charitable foundations and corporate giving, and the work of nonprofits, Bernholz said, the social economy in the past 18 months has experienced a “sea change.”

What has emerged is a marketplace of rapidly-growing choices and opportunities for individuals and companies “to engage directly in how they can use their resources to advance social good,” she said.

Investors in the capital markets, for example, increasingly are screening their portfolios to “align with their values,” she said, either investing in companies with social values they share or shunning those with values they oppose.

In a global market worth $7 trillion, that rapidly-growing breed of social investor can be a powerful force for social and global change.

And a growing number of states have passed laws that allow the incorporation of “benefit” corporations that have the twin goals of advancing a social cause while building shareholder value.

That approach, designed to make it easier for the companies to raise capital while eliminating the risk to their directors from lawsuits claiming the companies’ pursuit of social goals weakens shareholder value, likely will produce a “train-wreck” confrontation with traditional nonprofits, Bernholz said.

Convergence

The battle will be over, on the one hand, preserving the traditional definition and form of nonprofits, as well as the public policy that encourages charitable giving and, on the other hand, whether effective for-profit companies that have a social mission should have to compete against ineffective organizations that get a tax-exemption.

The convergence of sectors in the social economy is not a big issue for young entrepreneurs with a social mission, Bernholz said, because as long as their investment makes a difference, that increasingly effective and influential group of social investors do not care whether they invest in for-profit organizations or nonprofits.

Data and metrics

What social investors increasingly want, Bernholz said, are data and metrics that show the impact of a social program.

Data not only help a nonprofit or social venture tell its story better, but are critical to securing social investment, she said.

“You can’t grow the marketplace without measuring,” she said.

And today’s investors expect data to be available, she said, so nonprofits and social enterprises need to share information and be transparent about who they are, where they get their money, what they do, and their impact.

Philanthropy’s limits

Undermining the role of traditional philanthropy in the new social economy is the fact that philanthropy has “vastly oversold itself,” Bernholz said.

When private philanthropy agrees to try to help offset cuts in public spending for programs like those that have been eliminated in public schools, for example, it creates a “substitution effect,” she said, with taxpayers and government then taking it for granted that tax dollars no longer are needed for those programs.

And private philanthropy cannot begin to replace government funding to address basic public needs such as education, transportation and law enforcement.

“Philanthropy can’t do it all,” Bernholz said.

Leveraging

What philanthropy can do is try to leverage its assets, working in partnership not only with nonprofits and other charitable funders but also with for-profit companies and with government, and getting involved in policy work and advocacy.

Philanthropy, Bernholz said, “only makes a difference it if influences other resources.”

Another big trend in the social economy is the growth of private investment in political advocacy, a trend that got a big boost from the U.S. Supreme Court in 2010 in the landmark Citizens United decision that expanded the role corporations and unions can play in funding political broadcasts in candidate elections.

In the face of all these converging forces in the social economy, nonprofits need to be much more focused, strategic, collaborative, efficient and effective.

Showing impact

Regardless of its size and shape, and whether it lives in the nonprofit, for-profit or political world, a social enterprise that wants to attract social investment needs to be able to make a difference, show its impact and tell its story.

And despite seemingly overwhelming social and global problems, social investors still can make a big difference, regardless of the vehicle in which they choose to invest.

The key for them will be to picking social-change organizations that show they can make an impact on a particular cause by making productive use of the investment they get, and using that investment to build partnerships and secure additional resources to address that cause.

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