Charity selection

Charitable giving can change people’s lives. For example, £1,000 can provide a long-term social network for a disabled child, transport to allow 50 housebound older people to take part in community activities, or emotional health support for nine pupils for a year. When donors give to effective charities, the results can be rewarding for everyone involved.

But how can donors make sure they choose effective charities? On what grounds should they make their giving decisions? We outline the factors that New Philanthropy Capital (NPC) considers most important – return (i.e., results) and risk. We believe that thinking about these factors can help inform a donor’s decision-making.

Reasons for giving

Whether the reasons for giving are based on personal connections or a need to fulfil funding criteria, it is generally true that most charitable giving is not based on results—that is, the actual changes that occur in people’s lives as a consequence of the charitable activity being funded. There are many possible reasons for this lack of connection between the reasons for giving and results achieved.

NPC believes the main cause is that data on results is generally not available to funders. Because results are hard to measure and articulate, most charities do not have the evidence to demonstrate what they really achieve. So how can a donor incorporate results into their decisions? Whether or not evidence is readily available, we believe that a good first step is to get into the mindset of thinking about return.

Return and risk

NPC’s approach to charitable giving focuses on investing to deliver results, or equivalently, to generate a social return on that investment.

NPC believes that charities producing the best returns should attract more funding. Of course, funding any charity necessarily involves accepting some level of risk (e.g., the risk that expected results may not occur).

Return and risk are, therefore, the fundamental criteria donors should consider when analysing charities. Donors should look for evidence that a charity’s results (whether proven or projected) are significant, relative to others working in the same field, and that the risks of failure are mitigated as comprehensively as possible.

The implication of this approach is not that donors should consider only those charities offering high returns at a low level of risk, as different donors will have different appetites for accepting risk. It is worth mentioning that the relationship between return and risk is not necessarily the same as that seen in the commercial sector, where there is a functioning market for funding. Without adequate information flows on return and risk, there is nothing to drive a relationship between the two factors.

Delving into detail

NPC’s analytical approach breaks down return and risk into several factors that a prospective donor might consider:

Return: the results of a charity’s work

• Depth: Not all results are of the same magnitude. For example, a project providing information on benefits to pensioners via a website is likely to have less significant results than one which also works face-to-face to help someone apply for all the benefits to which they are entitled.
• Breadth: Not all results affect the same number of people. For example, a project examining the provision of palliative care services in a given county can have more far-reaching results if it shares these findings nationally.
• Change: Not all results lead to fundamental change, in that they may address the symptoms rather than the causes of a social issue. To tackle root causes successfully, results generally need to be achieved across a number of levels of society – at the level of the individual, their community, the services available to them and policy governing them, and society itself. For example, a project supporting people with mental health problems is likely to have more impact if it also campaigns for policy change and awareness throughout the UK, based on its experience of the issues.

Risk: the risk that a charity’s work will not deliver the expected return

• Strategy and concept: An untried concept may be risky but have great potential results. Equally, an activity or charity may not deliver results because it has not been designed to take into account the factors that could influence its success. These risks can be controlled by developing a strong strategy and logical model showing how the work will deliver results.
• Management: A charity that lacks strong leadership, clarity of vision and management structure is risky. These risks can be controlled by establishing the style, strength and capacity of a charity’s management.
• Operational: A charity lacking the operational capacity (i.e., processes, staff, systems) to deliver potential results is risky. These risks can be controlled by establishing a charity’s capacity in detail in these areas.
• Financial: A charity can face many financial risks, such as the loss of a particular funding source. These risks can be mitigated by actively managing funding sources, such as by diversifying funding streams and working to replace funding sources well in advance of them expiring.
• External: A charity can face many external risks, based on factors beyond its direct control – such as other organisations or stakeholders, or social, economic or political factors. For example, a charity may deliver high-quality training courses to get people into employment, but its clients may not be able to obtain jobs if the local economy suffers a downturn. These risks can be managed by regularly monitoring external conditions and influences.

As well as analysing return and risk, you also should assess organisational capacity. Further details of NPC’s analytical framework and an overview of our approach to return and risk is available in our report Funding Success, which is free to download online from our website.

Getting started with your giving

When approaching philanthropy you need to think through what you want to achieve with your giving, such as what issues you are interested in, and what social impact you want to achieve.

However, with over 160,000 charities in the UK it can be a struggle to find, and research, charities that fit with your giving strategy. The guidelines above indicate the factors donors should examine when choosing a charity. But analysing all of these details when looking at the return and risk associated with a charity requires a significant investment of time and effort, which is not something all donors have.

NPC aims to bridge this gap, providing donors with advice based on research and rigorous analysis. We help donors to find charities that match their areas of interest and to build a balanced portfolio of charity recommendations. Donors also can search for charities to fund within different sectors or geographies, and with differing results or levels of risk, using NPC’s online charity selector. NPC advisors can help you think through the issues and provide advice, whatever stage you are in your giving.

There are also other providers donors can use when searching for charities to fund. These include GuideStar UK, which provides a database of charity and voluntary organisations in England and Wales; The Big Give, which runs a website to help donors find charity projects in their field of interest; and Intelligent Giving, which has reviews of over 500 UK charities on its website, based on the transparency of the charities’ reporting.

 Recommended resources

• GuideStar UK
• Intelligent Giving
• The Big Give
• Martin Brookes, Cathy Langerman & Tristan Lumley, Funding success: NPC's approach to analysing charities, (London: New Philanthropy Capital, December 2005)
• Lucy Bernholz, Creating Philanthropic Capital Markets: The Deliberate Evolution (New York: John Wiley & Sons, Inc., 2004)

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