OVER the next decade, some 70,000 high-net-worth individuals in Asia are set to pass on an estimated US$2.5 trillion – an amount almost equivalent to the gross domestic product of France.
This wealth transfer is taking place in a complex socioeconomic context. Global issues such as food security, climate change, water scarcity and equity are gaining greater attention, especially among the wealth-inheriting generation.
In addition to investing in startups and enterprises, philanthropy, when done well, can contribute to tackling these challenges. But how does one “do philanthropy well”?
The rise of trust-based philanthropy
Donors have increasingly turned to trust-based philanthropy to disburse funds quickly and effectively to impacted communities amid recent disruptions such as the pandemic, the war in Ukraine and extreme weather events.
Trust-based philanthropy doesn’t mean using legal trusts. It refers to the traditional meaning of the word, and relies on donors’ confidence in the probity, intentions and capabilities of recipients.
This approach involves providing unrestricted funding to non-profit organisations (NPOs) based on donors’ beliefs in an organisation’s mission.
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Practitioners of trust-based philanthropy conduct upfront due diligence on NPOs to align their missions with their giving strategy.
This eliminates lengthy grant applications and extensive reporting requirements, offering NPOs flexibility in fund allocation to areas with the greatest need – such as to cover operational costs or new initiatives. NPOs decide how to use the funds, responding to the dynamic world we live in.
A counterpoint to ‘philanthrocapitalism’
This “no-strings-attached” approach contrasts sharply with the practices popularised by proponents of “philanthrocapitalism”, which advocates discipline and the application of managerial practices from the business sector to the non-profit sector.
Philanthrocapitalism introduced concepts and practices such as “social return”, key performance indicators, extensive reporting and external evaluation requirements.
Grants tend to be earmarked for the planning and implementation of specific programmes or activities, and overhead is viewed unfavourably. If funds are deemed ineffectively spent, a remediation plan must be in place or funding could be cut. Many donors, who are successful business leaders or entrepreneurs, embraced this concept.
Meeting these reporting and evaluation requirements, however, resulted in NPOs being tied up in bureaucracy. Many established dedicated teams to complete grant application forms, manage donor communications, conduct impact assessments and fulfil reporting requirements in specific formats that different donors prescribe.
The restricted funding approach – that is, earmarking funding for specific projects – also means NPOs may not have sufficient funds to invest in organisational development. As a result, many face long-term planning, hiring and retention challenges.
Not surprisingly, the business-minded donors question whether it is possible to know the impact of trust-based giving when there is less oversight, feedback, and evidence in the trust-based approach.
With high-profile scandals that hit the non-profit sector every now and then, some also argue that the trust-based approach undermines accountability and transparency by giving too much discretion to NPOs, which could squander the funds.
Data gathered from the NPOs shows the contrary, though.
The Center for Effective Philanthropy in the United States surveyed 632 NPOs that received funding from known philanthropist Mackenzie Scott to understand whether her gift increased their impact, how they allocated the funds, and whether there were downsides.
Almost all respondents stated that these grants had strengthened their organisation’s ability to achieve their mission, and their ability to innovate and reach communities where they seek to have impact.
Worthy of trust
These examples show that the impact of trust-based philanthropy can be measured, and that unrestricted funding furthers an NPO’s mission.
Of course, giving need not be entirely based on one approach or the other; philanthropists should maximise the best elements of both schools of thought.
A sophisticated investor diversifies; similarly, philanthropists can allocate a portion of their giving budget for trust-based practices while elsewhere maintaining their targeted approach that requires clear outcomes and metrics.
Using food security as an example, a targeted approach could take the form of making nutritious meals available in schools and shelters.
A donor will be able to track the number of meals delivered, the beneficiaries or the food banks established in neighbourhoods with fewer resources.
To address the root cause of food insecurity, donors could apply the demographic data gathered in the targeted project to inform policy development. They could engage in educational campaigns to reduce food waste or increase public awareness of the effects of climate change on food security.
Policy advocacy, public awareness and behavioural change initiatives are longer-term initiatives, where hard metrics such as “social return per dollar” are difficult to establish upfront.
A trust-based approach would enable NPOs to adapt and adjust their work to respond to constantly shifting end-user preferences and socioeconomic contexts.
A portfolio-based approach that combines a targeted approach with clear outcomes and metrics, and a trust-based approach that offers NPOs flexibility can achieve great and diverse things.
The writer is regional head of philanthropy services and advisory, Asia-Pacific, HSBC Global Private Banking
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