Investing in charities

By Cathy Pharoah
Director of Research
Charities Aid Foundation (CAF)

The last decade has seen a whole new approach to giving emerge - 'social investment'. With the changing shape of wealth in the UK (successful entrepreneurs now constitute three-quarters of the UK's wealthiest 1,000 people) and strong government backing for individual and social entrepreneurialism, ideas of investing for social change have taken firm root. For some donors, particularly those who have invested their own personal vision, sweat and financial equity in entrepreneurial growth and return, the idea of giving money away to charities for short-term social relief holds much less appeal than that of making investments to achieve long-term social returns. It basically means investing money and other resources for both a social and an economic return, with the balance between desired social and economic returns very much at the preference of the donor. It has brought a new set of pioneers and champions, tax incentives, and financial products and services - all aimed at investing in the growth of social benefit, as opposed to meeting immediate social need.

Social investment can mean investing in charities, projects, local communities or individual people ('social entrepreneurs') - whoever holds out the best promise of achieving long-term social gain through their vision and activities. This could mean, for example, helping disadvantaged people through providing low-cost loans to charities that provide them with employment and training.

Driving the idea of social investment is the notion of providing finance for charity growth and development through loans or equity-like mechanisms, as opposed to merely giving donations. Like any other type of investment, social investment needs resources, advice and information about the 'marketplace', a variety of vehicles for investment, tax advantages and a certain willingness to take risk. As this section of the Guide will show, all these are increasingly available to the donor/ social investor.

Providing finance

Charity Bank, itself a charity, has led the way in seeking grants or loans from donors which it can then on-loan at low-cost to charities seeking development finance. Another way of providing finance is to buy shares in one of the growing number of organisations offering this option, such as the London Rebuilding Society, which aims to provide low-cost finance to community groups and local social enterprises looking to generate sustainable social change.

Accessing tax breaks

In order to make it easier for smaller, local charities to access finance, the important role of community finance organisations was formally recognised. Community development finance intermediaries (CDFIs) build up funds for which charities and community groups can apply. Donors who make finance available through CDFIs can, subject to certain terms, be eligible for a 5% reduction in their income tax. Information on CDFIs is available from the Community Development Finance Association.

Experimentation and risk

Some investments carry higher risk than others. Innovative projects such as Venturesome are seeking support to on-loan or invest at a higher risk. Donors may be attracted by the chance to recycle their money a number of times, supporting small, entrepreneurial charities previously unknown to them. Both Venturesome and LRS have risk management strategies and tailor packages of support which best suit the charity or social enterprise - possibly consisting of a mix of grant, loan and equity-like investment.

Giving money and getting involved

Impetus Trust is a unique UK venture philanthropy initiative providing funding complemented by mentoring, and is seeking donor support both to build a pooled investment fund and a pro bono consultancy resource. Some donors may want to have a highly hands-on involvement in a charity in which they are making a substantial investment, while others will be content to stay at arms' length. Donors and charities can negotiate the relationship that best suits them.

Giving expertise and time

Investing for social change is not just a question of finance. Some major donors have invaluable experience and expertise to offer, and are awble to make time available to help or mentor charities. Heart of the City and Pilotlight, for example, link donor skills and expertise with charity need, and facilitate volunteering opportunities.

Giving through a community foundation

Those individuals wishing to invest in their local community may lever the expertise of a community foundation. Donors can either give to a general or themed fund, which distributes funds to a variety of causes, or establish a separate, named fund, through which they can direct grants based on their own charitable objectives. The community foundation advises on local needs and manages fund administration.

Sharing the cost and the fun of investing in charity

Investing is often a lonely business, and some donors may wish to supplement their philanthropy by also giving in association with others. One example is The Funding Network, where donors can get together to find out more about possible projects to support and provide joint support in a lively bidding process.

Knowing the marketplace

Many major donors will want to know that their 'social investment' is a sound one. An increasing range of information sources is becoming available to help donors select the charities in which they want to invest. The Charity Commission's Register of Charities can be searched on the web and provides a basic range of information on charity size, mission and location. This information will be greatly extended when GuideStar UK becomes fully available, providing access to a full set of all charities' accounts, annual reviews, and other documentation. It will also have a powerful search facility to help donors find particular types of charity that meet their interests. CAF's online donation facility, allaboutgiving will also provide donors with a search facility at the point of donation.

For a more detailed assessment of the most effective charities in particular fields of operation, New Philanthropy Capital has published a range of comprehensive reports, available free on its website, which provide in-depth information on needs and charities working in specific problem areas. NPC also advises individual donors.

The sky is now the limit for the enterprising social investor!

The Charities Aid Foundation (CAF), a not-for-profit organisation established in 1974, is committed to effective giving, both in the UK and internationally. Its work spans the full breadth of the charitable sector, providing a variety of services to individuals, businesses and charities. For more information, visit www.cafonline.org.