Is there a right or a wrong way to give to charity?
In our conversations with clients, we often encounter commonly held assumptions about giving that are often more nuanced than they seem.
Giving to charity can be a very personal matter, and quite a complex one, with minimal information on how to do it well.
This article marks the first in a series that we will be publishing exploring How to Give Well. The series will address commonly held questions and inspire philanthropists to maximise their giving.
Myth: Charities should have low overhead costs; all my donations should go directly to the cause
Answer: While it is certainly true that charities do not exist for themselves alone, enforcing low overhead costs (usually defined by the charity in how many pence in a pound does not go directly to their charitable work) actually restricts them and their ability to perform.
It can prevent charities from being able to monitor their work, design effective projects, and plan for the future.
Contrary to the conventional wisdom and public perception, studies have actually failed to find any correlation between low overhead costs and effectiveness.
Higher running costs can actually lead to better performance because this enables charities to prioritise learning, thinking and planning. We expect businesses to invest in themselves, but expect charities to do the opposite.
Using overheads as a proxy for effectiveness or efficiency is also only looked at in the context of charity.
For example, you wouldn’t want a car company to advertise the following: “90p of your pound goes directly to building the cars; only 10% of the cost goes towards testing, safety, and design.”
The truth is that it is important to do your due diligence on a charity and really do your homework. How are they tackling the issue that you care about? Are the leadership strong? Do they have good governance and do they report on what they have achieved? Is their information transparent? Once you have reviewed and understood a charity well and how they are making a difference, supporting them with core funding rather than donations to specific projects will enable the charity to be much more nimble and effective: they will be able to use your gift where it is needed most.
Myth: Big/small charities are inefficient
Answer: The size of an organisation is not always a good indication of the quality of its work; the effectiveness of its programmes is a much better marker. At the same time, bigger charities can have advantages to smaller charities in terms of their power, recognition and economies of scale.
On the flipside, lots of small charities working on the same issue but separately can result in duplication of resources and effort that is also inefficient. Either way, by doing your research on the projects delivered by a charity, you are in a better place to decide where to donate money to.
Myth: Impact investing is more effective than traditional philanthropy
Answer: In some cases, impact-driven investments may be more effective but in others, charitable donations could be a better fit.
There are many different types of impact investing: anything from screening out ‘sin stocks’ to social investment like CAF Venturesome. It might be helpful to start with the idea that impact investing can have three types of impact: enterprise impact, financial impact, and non-monetary impact.
Enterprise impact is the social impact that a company has. In other words, how effective is that company at solving the social issue it seeks to address? And is that always more effective than directly donating to a charity? Not necessarily.
One example we can look at is anti-malaria nets.
Evidence suggests that distributing nets for free is much more effective than asking people to pay, since charging significantly reduces demand. Therefore, if you were investing in a social enterprise that sold beneficiaries anti-malaria nets you might actually have less impact than if you were donating that money to a charity that gave them out for free.
Financial impact is the impact that your investment has. If an impact investment opportunity gives market-rate returns, it could attract a socially neutral investor who is just looking for a good investment opportunity. The company would not have an issue raising capital, and so your donation could have more impact by going to an effective charity.
This leads us on to non-monetary impact, which is the skills, knowledge, and expertise that you can bring to a company that another investor could not. This type of impact means that you are likely to have more impact in private markets, where these types of resources are more needed. It might also mean that you can identify financially rewarding and impactful investment opportunities that other investors may not have come across.
Again, we would recommend an approach of exploring your options. Impact investments can be an impactful choice in some areas, but not in all. To learn more about key definitions, concepts and how to determine when which method is more effective, tune into our impact investing webinar.
Myth: Organisations working directly with beneficiaries and communities are more effective than those working to affect systems level change
Answer: Both approaches can be effective. The question is how you perceive the problem you seek to address, and the change you want to see.
An organisation working directly with communities or beneficiaries can be very specific and targeted, and as a consequence may have a higher chance of success. It may also be easier to measure the impact of their programmes, since the link between the intervention, and the result, will be more direct.
On the other hand, organisations working to create a systemic change by necessity have to work with a wider range of stakeholders.
This type of work is harder to evidence because of the number of stakeholders involved, and the difficulties inherent in changing a system.
However, if successful, it can also be far more impactful because it would result in a change in policy, or the provision of a service, to a whole group of people as opposed to a specific community.
Myth: I don’t have enough money to make a meaningful difference
Answer: The key determinant of the difference your donation will make is the difference that the charity you’re supporting makes.
While it’s true that the size of your donation can make a bigger or smaller difference to a charity’s finances depending on size of its budget, in terms of the impact your donation can have, it all comes down to the charity you choose.
If a charity runs really effective programmes, then your donation will make more of a difference than if it goes to a less effective charity.
You can find out how effective a charity’s programmes are by looking at the research and evidence into that particular approach.