Philanthropy in 2013: Worry on Cliff Tax Changes; Impact Investing Heats Up

Charities await possible changes to tax laws, as impact investing, donor collaboratives and global philanthropy show strong potential

Not all charitable organizations are alike. In 2013, some nonprofits can look forward to robust donations, while many others will continue to worry about where the next dollar will come from, according to Melissa Berman, president and CEO of Rockefeller Philanthropy Advisors.

In the coming year, impact investing will gain increasing traction among philanthropists, and a global culture of giving will continue to emerge, Berman said in a recent telephone interview with AdvisorOne.

Rockefeller Philanthropy Advisors is an independent nonprofit consulting firm that spun out of the Rockefeller Family Office about 10 years ago. The firm advises ultra-wealthy individual, family, corporate and institutional donors on philanthropy; it includes some 50 members of the Rockefeller family among its clients, Berman said.

The Year Ahead

As the fiscal cliff negotiations drag on (as of Dec. 25, hope for a resolution was dim if not extinguished), the entire outlook for the philanthropic and nonprofit sectors is clouded by uncertainty about what will happen with the individual charitable deduction, Berman said. However, many ultra-high-net-worth donors have decided to lock in a charitable deduction at the current level.

“They are putting more funds than they usually do into either a private foundation or a donor-advised fund,” she said. “I don’t think that trend is going to be large enough to have a significant influence on charitable giving across the whole U.S.”

Into 2013, the economic environment will be the key factor for most charitable giving. As studies have noted, U.S. donors generally give away around $300 billion per year. Most of those are small donations from individuals, and modest donations to local institutions, “which is part of what keeps the wheels turning here in the U.S.,” Berman said.

For most of those donors, their attitudes about whether they feel secure in their jobs and whether they feel prices are rising quickly or not determine how generous they can be.

“Only the top 20% of the donors have the luxury of taking a longer view,” Berman said. Those donors drive a very disproportionate amount of giving, and already they are beginning to feel that the worst parts of the recession are behind them.”

As a result, “that part of the philanthropic giving is going to be strong in 2013,” she said.

The major education, health care and cultural institutions, which receive significant donations from wealthy donors, are in a good position, and indeed an improving one. “We survey our donors every year, and by March 2012, close to half of our donors were already planning to increase their giving. This is probably a combination of putting more money into a philanthropic vehicle and donating more money directly into public charities.”

Not so fortunate are small local organizations that rely on lower-income donors. “Some of them, especially in areas like the New York area that was so hard hit by Hurricane Sandy, are already feeling that some of their donors gave more in 2012 to help out with Sandy and essentially borrowed from their budget allocation in 2013.”

For small nonprofits in the U.S., then, 2013 is still a very uncertain environment. “We’re nowhere near back to the kind of comfort level individuals across the country had before the economic downturn began to be felt in 2008–9.”

Impact Investing Evolves

The impact investing field of philanthropic activity has been developing rapidly, and promises to gain more adherents in 2013, according to Berman. For Rockefeller Philanthropy Advisors, impact investing is any investment that is made with an eye toward a social and environmental return as well as a market return.

That market return could be a high-risk, potentially above-market return, or an investment opportunity that is at market. Or it could be one that offers a below-market rate of return in which the donor decides to invest because of its social and environmental return, such as funds for loans to businesses in low-income communities.

“You’re making set of choices, almost like on a 2x2 matrix, of how much financial return do I want and also how do I want to think about social and environmental return,” she said.

At present, impact investing opportunities can be found in different asset classes, from short-term fixed income all the way to private equity, and across all the major issues areas: health, education, environment and basic social services.

“Many donors look at this and say, maybe I have an opportunity here to think about if I have a foundation, how do I use the underlying assets in the foundation to advance my mission as well as using that 5% stream that I typically use to make grants.”

Moreover, Berman said, people are becoming more sophisticated about impact investing. In particular, they are using these tools for global development. They are looking at opportunities in which some of the capital is philanthropic, some is investing and some may be coming from the public sector.

Donor collaboratives will also get more focus in the year ahead; already these are enjoying success. Although people have long seen the advantages of pooling ideas and resources toward a common goal, the philanthropic sector does not offer many incentives to do this, Berman said.

“But as more and more people start to think about the idea of solving a problem rather than being a generous funder of good organizations, they begin to realize that the numbers are not on their side and that it might be better to find partners.”

She said donors are coming to understand that if a nonprofit group could submit one proposal with one common set of performance standards and outcomes indicators to 20 organizations, not only would it save a lot of time, but the funders would begin to have ways they could start to compare the grant making and their impacts.

“Suddenly, we’re getting a kind of marriage of the drive to take a systematic approach to solving a problem with a drive to be able to have clear and consistent outcomes. You can’t have the latter if every single funder and every single nonprofit are inventing their own set.”

Not Just in America

“We’re beginning to be very involved with philanthropy outside the U.S.,” Berman said. Indeed, she and her colleagues have become globetrotters, making presentations in Mexico, Europe and several places in Asia, including China and Korea.

“We’re beginning to see something of an emergence of a global culture of giving, which is more of a shared point of view among wealth holders around the world rather than just having this deep involvement in philanthropy being a U.S. phenomenon.”

She said the highest echelons of global wealth holders partake of a global community, meeting with one another at Davos and doing business with one another. “They all know about the Clinton Global Initiative.

“They are beginning to cross fertilize with one another about the idea that a family with significant wealth should be deeply involved in philanthropy; more than merely generous, it should be involved and knowledgeable on the issues. There’s the sense that as income equality begins to rise, people with wealth should be part of addressing how to make the system work better for more people,” she said.

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Check out AdvisorOne’s complete lineup of Outlooks for 2013.

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