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Ok. Got itBy Noxolo Hlongwane, Head of Philanthropy, and Warren Poole, Wealth Manager, at Nedbank Private Wealth
At the end of the 19th century philanthropy was significantly transformed from being an ad hoc form of giving intended to meet a specific need for support, to a highly strategic, investment-based way of doing good, potentially for perpetuity.
This transformation was driven by a recognition that the effective investment of donor funds could not only enhance and broaden the philanthropic impact, but also extend the timeline over which donations could be leveraged in support of beneficiaries.
Well-known philanthropists such as Sage, Carnegie, Ford and Rockefeller pioneered strategic philanthropic giving and the important role of investing in capital markets, typically by means of foundations or trusts, which had been their preferred approach to giving. Even today this remains a highly effective model by which to ensure the sustainability and impact of philanthropic giving.
The logic is sound. Investing in financial markets offers the best potential for capital growth over time, thereby enabling philanthropic trusts to do more, for longer, as their well-managed investment portfolios grow.
The catastrophic global impact of Covid-19 has prompted many philanthropic foundations to consider whether they can afford to retain a large, future-focused philanthropic investment portfolio when there are so many people in dire need of immediate life-saving assistance.
Unfortunately, there is no easy answer. And the response by each philanthropic foundation will largely depend on its mandate and some difficult conversations between trustees, donors and, where necessary, also with beneficiaries.
Some foundations are leaning towards fundamentally rethinking their long-term objectives and using their assets to make a positive difference right now. The Alfred and Mary Douty Foundation, which was established 52 years ago to foster equitable opportunities for children and youth in Pennsylvania in the US, is a case in point. This foundation has decided to wind down its operations as a private foundation and liquidate its assets. They are now focusing on using these assets to accelerate change in the sectors they support.
It is a noble decision, and one that must have been extremely difficult to make. But it is not necessarily the right course of action for every philanthropic entity. If every foundation wound up its operations and disbursed its assets, the immediate benefits would be significant, but unfortunately so too the consequences for those in need of help in years and decades to come.
Those foundations that do wish to retain their long-term objective to do good are facing some challenging decisions in the current difficult economic climate. This is especially true for foundations operating in South Africa. Covid-19 has had a massive impact on the already weakened and volatile South African markets, widely eroding value for investors. Given that many foundations depend on investments (their own or those of their donors) and especially dividends to bolster their capital bases, the funds available for distribution may be highly constrained for some years to come. Add to this the desire of many donors and foundations to use at least some of their assets to support immediate social needs, and the challenge of securing long-term philanthropic sustainability becomes clear.
Against this backdrop, it is vital that foundation trustees honestly assess the viability of their distribution strategies and willingness to revise their approach, in consultation with their donors and beneficiaries, to balance this against the likelihood of lower income growth in future.
This potentially protracted low-growth environment also means that it is incumbent on trustees to review their investment objectives and discuss these, realistically, with their investment managers. While it is impossible to predict what the portfolio returns will be over the next 10 years, it is essential that expectations are realistic and asset allocations adapted where necessary to balance risk and return in an uncertain environment better. A more risk-averse approach may of course result in lower growth, which is why these discussions must also inform the distribution strategy, and vice versa.
Finally, it may be necessary for trustees to make some tough decisions regarding the nature and extent of the support they offer in the future. In some cases, a more targeted approach may be needed, where the number of beneficiary organisations is reduced to ensure the longevity of funding and to maximise its impact. These conversations will obviously need to include input from donors, and possibly beneficiaries, and cover issues such as whether stakeholders are prepared to sacrifice a measure of future support to deliver help where it is needed now.
Ultimately, while the content of these conversations will differ from foundation to foundation, what matters most is that trustees are proactive in initiating conversation as soon as possible. Where there are gaps in understanding or skill, the value of external input from a professional philanthropy advisor or management body cannot be overestimated.
The outcome of this is that, in this time of unprecedented demand for philanthropic support, trustees of foundations are going to have to balance providing immediate relief with delivering social impact in the future. Honest, open and transparent communication between all foundation partners is the only way of achieving such a balance.