Finance Can Fund a Revolution in Giving

By Alexander Friedman and Patty Stonesifer

Finance has been pilloried in recent years for putting profits ahead of people. At its best, it still performs a noble role: connecting investors to investments and fuelling industrial innovation. But finance could also do far more to help tackle social problems instead of leaving the challenge to governments drowning in debt and philanthropists with limited resources.

Look at the numbers. US foundations alone have around $700bn in assets. They give away about 5 per cent of assets annually, about $35bn. This is a lot of money, but not when compared with the investment management industry, which oversees more than $100tn.

Our experience suggests investors want to devote more money to making the world better. They ask their advisers how to do that, but usually do not get a helpful answer. They are also put off by the complexity of establishing their own foundation or remain unconvinced they can give away their money as effectively as they earned it. Yet if investment advisers helped clients to direct just 0.1 per cent of their assets to philanthropy, total funds would increase by around $100bn a year. $1tn could be unlocked this decade.

 

Here is what the industry should do so clients can meet this goal.

First, banks should create an independent vehicle so clients can support the world’s most effective social programmes. Foundations have proven programmes that lack full funding. In return, foundations will have an incentive to improve transparency and make public their priorities. They will also be rewarded for due diligence in grant-making. It will create a marketplace of philanthropic ideas, open to public review, with the best programmes most in demand. The financial intermediary would make philanthropy as easy for clients as buying a share of stock or investing in a mutual fund.

In this way, individuals could tap into the insights of the top foundations, just as they do with top professionals in venture capital. It is the same strategic reasoning used by Warren Buffett when he chose to invest his philanthropic capital alongside Bill and Melinda Gates.

Second, investment management firms should scale-up their offers of so-called “impact investments”. Impact investing is a nascent asset class that can offer investors both financial and social returns by supplying badly needed capital to businesses producing public goods, such as microfinance and clean technology. In today’s low-yield investment climate, impact investing is becoming more attractive because it is relatively uncorrelated to the broader market. And investment firms should show their seriousness by co-investing alongside clients.

Third, investment banks should use their own employees to create social finance teams. Foundations and non-governmental organisations are experimenting with applying finance to some of the most challenging problems of our time. For example, the International Finance Facility, supported by investment banks, the World Bank and other players in the financial industry, uses long-term pledges from donor governments to sell “vaccine bonds”, making funds immediately available for the purchase and delivery of millions of lifesaving vaccines while providing returns for bondholders.

But we need dozens of these offerings and this requires access to the talent present in the financial industry. Banks should allocate a defined portion of staff time to social finance, similar to the way the legal profession institutionalised pro bono work. The most important work should be awarded to the brightest and best-paid people. When the tech industry got serious about using its assets for good, we saw efforts such as Google tracking dengue fever outbreaks. Finance could produce an even greater impact.

Over the past 50 years, the financial industry has built a huge infrastructure to manage investments and along the way has been roundly criticised for seemingly subjugating the welfare of society to short-term profits. It now has an opportunity to change the debate by opening the capital markets to the social sector in a manner that is good for investors and great for the world.

The writers are chief investment officer at UBS, and the former CEO of the Bill & Melinda Gates Foundation

Copyright The Financial Times Limited 2012. You may share using our article tools. 
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