The £10.6 billion question

Philanthropy UK is grateful to the many philanthropists and advisors who contributed their thoughts and experiences to this article.

It is only a matter of time until the statistics officially confirm what many of us already know: the UK is in a recession. Headlines in the third sector press are full of doom-and-gloom, and charities are bracing themselves for dire circumstances and worrying that charitable giving – which, before the banking crisis, grew 8% yr/yr in real terms, to £10.6 billion for 2007/8  – will fall off a cliff.

This concern is not completely unfounded. Portfolio values have dropped precipitously, with 20%-40% losses not uncommon, and jobs have been lost or are threatened.  But worse than the dramatic fall in asset values is the uncertainty: it is difficult to plan when market volatility is so high that there is little visibility for next week let alone next year.  And we know from our own research (Why Rich People Give, 2004), that feelings of financial insecurity are a real barrier to giving.

In the face of so much uncertainty, it simply is too early to tell what the real impact will be on charitable giving. Still, whilst the evidence so far is mixed, the severity and speed of the economic downturn suggest that the sector will most likely face a difficult fundraising environment over the next 12-24 months.

The £10.6 billion question is, “How bad is it?”

Rose-tinted glasses

Fortunately, the panic pervading the sector is not mirrored in the donor community, although funders are being cautious.  Here at Philanthropy UK we remain cautiously optimistic about charitable giving, for a number of reasons.

First, historically, swings in giving tend not to be as dramatic as swings in the broader economy (see ‘What gives in a recession’, in this issue).  While people may cut back on their giving in a recession, they give more of what they have. Foundation grants also generally prove resilient in a downturn. A survey of Association of Charitable Foundations members underscored the importance of the long-term view of endowed foundations, who “predominantly fund for perpetuity and [so feel that] current circumstances need to be viewed with a longer lens”.

And, whilst corporate giving is more likely to suffer, as it is directly tied to profits, community programmes usually remain a priority. Catherine Sermon of Business in the Community commented, “The will is not diminishing, but the means are.”

The outlook for individual giving is more mixed. Charles Mesquita, Charity Specialist at Rensburg Sheppards Investment Management, explains the widespread caution: “People have been tightening their belts over the last six months or so, and there is less disposable income. This will inevitably impact giving.  The current economic situation is affecting all strata of society – people are likely to remain cautious for the next year or so.”

However, a number of advisors report that client demand for philanthropy services remains strong. Tanja Jegger, Head of Philanthropy at Stonehage, the wealth manager, says that, “We have on balance seen greater demand for philanthropy services this year, with a strong pipeline for 2009 in the UK, Switzerland,  Israel and South Africa, which is very encouraging. In particular, donors are showing increasing interest to collaborate with peers to optimise the  efficiency and impact of their giving.”  Clive Cutbill, a Partner at Withers Worldwide, the law firm, observes, “Commitment and recognition that money is needed now probably keeps many giving.”

At private bank Coutts & Co, Maya Prabhu, Senior Philanthropy Adviser, says, “We are relatively bullish that philanthropy amongst wealthy individuals will remain high on their agenda based on the continued interest our clients have shown in giving both time and money and their requests for advice on how to channel this most effectively.”

And Heather Maizels, Advisory Board director of Barclays Wealth, is also cautiously optimistic, “Frequent unexpected events have undoubtedly impacted client sentiment. But for those clients who are riding the storms well, have significant capital and are minded to make significant donations, they are even more committed to the need to do this.”

Moreover, whilst there are likely to be far fewer company sales or other ‘liquidity events’ in the near term, there already has been a lot of wealth transferred to charitable foundations or donor advised funds, such as charity accounts at community foundations or CAF, and all of these (albeit reduced) contributions will make their way to good causes. The Coutts Million Pound Donors Report, published last month, found that over half (56%) of the value of donations worth £1m or more made last year were 'banked' in trusts and foundations, rather than 'spent' on charitable activity.

Similarly, pledged gifts generally remain firm, and Philanthropy UK does not know of any pledges that have been rescinded completely. A few donors are renegotiating the terms of major gifts, but this is more likely to be extending the length of time over which the gift is paid out, rather than the total amount of the gift.

So, while the capacity of donors to give may have decreased, their commitment to the sector has not.  They remain passionate about their philanthropy, and recognise that charities, especially now, need their support.

Vitally, not all philanthropists plan to decrease their giving. The Director of the Wates Foundation responded, “As a grant-maker, the trustees believe that we have a responsibility to continue to support the sector with new awards at a time when the average charity is most likely to be hit by reduction in income.”

Meanwhile, a number of philanthropists noted that they will not decrease their giving because they remain focused on longer-term plans.

Sir Ian Wood, Chairman of the Wood Family Trust in Scotland, told Philanthropy UK, “We are working with pre-allocated funds on long-term plans. We’ve always been focused on fewer charities looking at clear measurable impact and we always seek to leverage our funding wherever possible.  Our position on this has not changed.”

A London-based philanthropist responded similarly: “I have commitments which I intend to honour, especially when there is even greater need in these difficult times.”

Philanthropist Dame Stephanie Shirley commented, “We will maintain our grant giving, even if this means eating into our foundation’s capital.  All our planned expenditure (on the scale of last year’s £1.25m) is held in cash.”

Doug Miller, founding trustee of the European Venture Philanthropy Association, added, “My giving will not change as I have long-term strategic goals and set aside funds to achieve those goals during the bubble.  My investments in philanthropy have increasingly become strategic, looking at ways to leverage my involvement and to affect the dynamics of the whole sector.”

And, at a time when many people are re-evaluating priorities, David Gold, chairman of A Glimmer of Hope UK foundation and of the Philanthropy UK advisory board, argues for taking a holistic approach to portfolio management: “At a time when people are looking at their investment portfolios, maybe they can take the time to revaluate their position. Paper wealth was created at speed and lost at a faster rate. Investing in charities would have yielded a higher social return and an improvement in human capital... and it may have been fun too!”

So what gives?

While some philanthropists foresee no change of plans, others are considering changing the way they give, if not the amount.  Donors told Philanthropy UK that they are likely to be even more focused on impact, efficiency and leverage, accelerating the ‘new philanthropy’ movement.

Katharine Barber, director of the Capital Community Foundation, reported that, “While it is proving much more difficult to diversify our donor base in this climate, the incentive of our £-for-£ match funding leverage has worked in mobilising donors with whom we already had a relationship, and so seems to have had a certain recession-beating impact.”

Some philanthropists indicated that they are less likely to fund outside their favourite causes, or that they will curtail expansion and new initiatives.  Charities are likely to find prospecting for new donors especially difficult. Lyn Shears, a philanthropist focusing on local causes in the Northeast, explained, “As we will have less income from our endowment, and are already committed to a number of three-year grants, we are less likely to take on new pledges and commitments.”

Sheetal Mehta, co-founder of Shivia Microfinance, responded, “We will be more focused on the projects we work with and go deeper into the specific deals rather than try to work on the surface with many organisations.”

Others may respond to the changing economic environment by focusing on different causes they feel are more vulnerable in a downturn. Alan Hodson, a director of The Funding Network, said, “I may be more likely to give to UK charities as the recession is creating even more need, and I’m keen to encourage individuals or groups who are showing commitment to resolve issues within our local communities.”

Steven Dawson, founding chairman of venture philanthropy Impetus Trust, commented, “Charities dealing with poverty in all its forms will need more resources in a downturn. There is also increasing concern about the lack of progress on social mobility. This may even get worse as unemployment rises, leading to increased risk of social unrest.  It is important for donors to at least maintain their giving to combat these trends.”

Another venture philanthropist summarised, “The economic downturn is likely to affect my giving in complex ways.  This could involve focusing my support more, exploring avenues that help disadvantaged communities weather the global downturn, and expecting charities I support to deliver their work more cost effectively and creatively.”

Additionally, a number of philanthropists we spoke to noted that it will be especially important for charities to avoid replicating others’ work and collaborating wherever possible.  Andrew Hind, chief executive of the Charity Commission, noted at the NCVO Recession Summit in November, “One of the single most important things charities can do in a recession is to seek opportunities for collaborative working and mutual support.”

Finally, whilst charities (in England and Wales at least) anxiously await Government’s action plan for the sector, to be announced in the New Year, they should take note that some of its previously announced plans may already be having an impact. The new 45% tax rate (or 47% with incremental national insurance) may stimulate more giving by the wealthy, but it also may sway some committed givers to hold off on donations until the new rate takes effect in 2011.

Towards effective giving

These are, indeed, extraordinary times. Yet, as history shows, recession does not portend the end of philanthropy.  And the UK clearly has many committed, passionate and engaged philanthropists who recognise the need and are responding to the best of their ability.

We do however need more such role models – more donors willing to ‘stick their head above the parapet’, to share their experiences and to inspire others to become more philanthropic.

In the current environment, when the needs are even greater, donors have an opportunity to make an even greater impact.  Private individuals can take risks, and operate at a speed, with which government and other funders simply cannot. This might involve helping a charity acquire assets at good value, or being more flexible with their support, for example by making unrestricted grants or allowing project-related funding to be re-allocated to core expenditure.  There are also opportunities to be more strategic, such as by helping to bring about sensible mergers in the voluntary sector, rationalising services and building necessary scale. 

Still, good philanthropy does not always need to be ‘strategic’ to be effective: ‘charity’ is still important, especially as the recession is causing real hardship. There are many ways to have an impact:

Impact is the social return on your investment in a disadvantaged community; it is the standing ovation at the performance of a musician you have supported; it is inspiring others to give. Impact is a park preserved; a patient cured; a diploma earned; a mouth fed. Impact is helping a woman gain the self confidence she needs to start her own enterprise; it is the smile on the face of a young cancer patient, simply because you showed up; it is your own satisfaction in knowing you have made a difference. (A Guide to Giving, 2nd ed.)

Good philanthropy is about having the right mix of heart and mind and knowing that, whatever the size of the donation, what really matters is the size of the impacts that are achieved.

---

The view from the Continent

Professional advisors across Europe report a similarly mixed outlook for philanthropy. 

In the Netherlands, Jacqueline Detiger of Filantropia notes that declines in foundations’ assets vary widely (by 4%-23%, as reported in De Volkskrant, a Dutch newspaper), and that, while they will continue with existing projects, some foundations will not start any new projects in the near term.

Meanwhile, Rosa Gallego of the Association of Spanish Foundations says that it is too early to tell what the impact will be in Spain. The number of their new foundation members increased in 2008, but the first, albeit indirect, test will be when memberships come up for renewal in January.

Polish donors may benefit from lower income tax rates in 2009, making more money available for philanthropy. However, Agnieszka Sawczuk of the Foundation for Poland observes that many wealthy individuals do not distinguish between their personal and their business wealth, and so giving may yet still decline. She suggests that donors may seek to have more impact by focusing on fewer organisations and leveraging their support.

In Switzerland, philanthropy appears to be relatively resilient, at least for now. Heiko Specking of VALUEworks, a multi-family office, reports continued strong interest in philanthropy amongst clients: “They see opportunity in the crisis, leading to new outlooks, and may for instance refocus their engagements to areas not supported by government or other funders.” Etienne Eichenberger of Geneva-based wise philanthropy advisors has seen “only minor-to-no change” in plans by clients, and “remains optimistic about 2009.”

---

What can charities do?

Philanthropy UK asked our philanthropist contributors what charities could do to encourage them to continue to give or to give more. Their responses offer no surprises, and indeed, represent good practice in any economic environment.

Above all, donors want charities to be effective and efficient. Transparency and accountability are crucial, and charities must be able to demonstrate their impact. They also need to pay attention to their own organisational development, governance, and financial management: “Diversify funding sources, watch expenditure and squeeze out ‘unnecessary’ costs”.

Charities should remain focused on their mission, but be clear about what value they are adding: “Don’t replicate, and collaborate wherever possible.”

When approaching a donor, be clear about the ask: what do you want the donor to support, and what value can they add to your organisation that others cannot? Be compelling.

Finally, recognise that philanthropy is a social relationship, and not merely an economic transaction. Take good care of your existing supporters (especially as prospecting becomes more difficult).  They are hurting too, but if you engage and inspire them, they may just yet rise to the challenge.

--Also see Ken Burnett’s appeal to fundraisers in this issue.