Philanthropy: how to invest for the greater good

Supporting the right causes can make a difference to the lives of thousands of people, help the planet and also set an example for future generations. In essence, it's about giving back to society and making a more direct contribution to causes that are close to each of us. But what exactly is philanthropy, what are its different forms and, most importantly, how do you choose and support the right one?

What is philanthropy?  

Philanthropy refers to any individual or collective activity that supports actions and projects aimed at the common good and the development of society. It is a way of making a difference in the world by investing in projects or companies that generate a positive social and financial impact.   

Amount donated (in billions) vs. S&P index performance

Source: Giving USA 

By 2022 the amount donated in the US approached USD 500 billion. Interestingly, philanthropic giving is highly correlated with the strength of the stock market, as can be seen by comparing the volume of giving with the performance of the S&P500 index. This trend reinforces the idea that for many people and companies it is important to support the most deserving causes after a year of good investment results. But what is the impact of this investment?   

What is the impact of philanthropy?  

Over the years, philanthropy has played a fundamental role in the development of social policies and in the fight against poverty, injustice and inequality. It is therefore an essential complement to public action in defending the interests of society in a wide range of areas. One of the main targets of philanthropic investment is humanitarian aid in response to natural disasters, particularly the recent pandemic. As with the response to most natural disasters, the majority of funding came from corporations, followed by family foundations.   

Origin of donations for the fight against natural disasters and pandemics (2017-2020) 

Source: Candid

The structure and types of investments associated with philanthropy can be quite diverse. Investors can support agribusinesses, housing initiatives, innovative environmental projects, medical technology or literacy programmes anywhere in the world. Making the right investments in the right projects at the right time is part of the challenge. 

However, philanthropy giving is not only good for society, but also for the donors, both financially and personally. Although these activities are not directly profit-driven, some of them allow wealthy families to make a financial return by including this type of responsible investment in their personal financial portfolio. In addition, studies suggest that philanthropic activities can improve the emotion state and physical well-being of philanthropists, with clinical implications: less depression, higher self-esteem, lower blood pressure and greater longevity.

What are the different types of philanthropy?

There are 3 main approaches to philanthropy, and it is important to understand them in order to determine which strategies make sense within a broader investment vision.   

1. Hybrid philanthropy: striking a for-profit/non-profit balance

This approach refers to structuring your giving around creating a for-profit company and a non-profit organisation, both of which serve a similar purpose.  The advantage is twofold. On the one hand, the non-profit organisation provides access to certain support, grants and tax benefits, and on the other, the for-profit company can attract more funding from investors. Philanthropists can therefore combine the best of both worlds for maximum impact.

2. Venture philanthropy: investing money and time 

Venture philanthropy stems from the idea that the same practices and principles employed by venture capitalists can be used in the social sector and toward philanthropic goals. This type of approach typically involves supporting projects in their first early months, when the risk is high and the financial yield uncertain. The aim is to invest in initiatives with a high potential for social impact, even if there is a high probability of failure. 

In this case, philanthropists are willing to take high risks because their ultimate goal is to create significant change in areas of great social need. This approach takes time and can be challenging, but the potential for real, sustainable impact is significant.

3. Impact investing

Impact investing and venture philanthropy share some similarities, in that they both use investment capital for philanthropic efforts. However, impact philanthropy involves financial investment in companies, organisations or projects that, in addition to creating a positive social impact, also aim to generate profit.  

In general, these are companies, organisations and projects that work on innovative and scalable solutions and whose primary purpose is to solve social, environmental or health problems. Impact investing is growing in popularity: according to the Global Impact Investing Network 2022 report, the global impact investing market is worth around US$1.16 trillion and is particularly popular with millennials and younger investors.

How do you choose a philanthropy cause?  

The first step in selecting causes to invest in is to talk as a family about shared beliefs and values, and what each member wants to achieve. Then it is possible to identify the most important causes and the specific needs of both the family and the chosen communities.  

When considering the reasons for becoming involved in philanthropy activities, it is important to bear in mind that these reasons may change over time. It is also a good opportunity to involve the younger members of the family and to pave the way for the next generation of philanthropists.  

In this process, you should consider exchanging ideas with other investors and seek the support of experts to manage the process in a professional and, therefore, safer and more effective manner. Banco Carregosa's private bankers can assist in the identification of the family's needs and in the allocation of capital to objectives in line with the family's profile and objectives.

How can you help the causes?  

There are several types of vehicles and legal structures available to facilitate families' philanthropic efforts, with varying degrees of complexity and each offering different advantages and trade-offs. As they are not mutually exclusive, they can be used in combination. 

By opting for a simpler approach, families can start by choosing responsible, socially responsible and sustainable investments. Some of the most sought-after social investments are those based on ESG principles (Environmental, Social and Governance). In this case, you can invest in companies that meet these important environmental, social and corporate criteria, that are committed to tackling future global issues and have promising long-term performance potential. However, as with any other type of investment, it is important to be prepared for the inherent volatility of the stock market and to assess the level of risk involved according to your objectives and profile.

How can you monitor investments?  

"How can I make a difference?" and "How do I make sure my money counts?" are some of the most common questions asked when evaluating and tracking investments.  

In this process, it is important to rely on the expertise of external specialists who have in-depth knowledge of the area of interest in order to better monitor and evaluate the performance of the investments. Monitoring takes time, and any early assessment may lead to unfounded and even incorrect conclusions about the investment strategy. And if results are not as expected, they still provide guidance to correct and improve the strategy. 

Banco Carregosa, at your side to support your philanthropic initiatives  

There are several aspects to consider when investing in philanthropic initiatives, which can be overwhelming for those taking their first steps. At Banco Carregosa, you will find a team of experts to make the destination of your investment more flexible and efficient. You can rely on us to help thousands of people around the world and increase your impact in a sustainable way.