When it comes to financial investments, many take a risk-based approach to building their portfolio, mostly to maximise investment returns and mitigate financial risk. You can take a risk-based approach with philanthropy, too; there are proven and unproven ways to achieve social change. Unproven methods can have outsized benefits if successful, but may be higher risk. Depending on your attitude to risk, it may be worth incorporating such methods into your philanthropic portfolio.
A risk-based approach enables philanthropists to be more strategic and impactful by supporting a portfolio of charities aligned to their social vision and goals. This allows portfolios to be diversified, and provide higher chances for impact through philanthropic leverage. Taking homelessness – a complex and multifaceted issue – as an example, supporting shelters, policy implementation, mental health support, and housing are some of the different angles one could take, each with a different risk profile.
It is important to highlight that when talking about risk in philanthropy we are referring to philanthropic risk, not financial risk. There is a lack of common definition around ‘risk’, and a lack of open and honest discussion too, which affects funder-grantee trust, relationships, and impact. For many, not understanding the risks and benefits of different approaches often results in taking a risk ‘averse’ strategy, distributing grants toward methods with high chances of success.
At CAF, we define philanthropic risk as the certainty of your donation achieving a result and/or impact. As such, supporting the pilot of a new initiative would be considered higher risk as it has not been tested before, however, if successful, it could have significant impact. Conversely, supporting well-evidenced approaches would be lower risk as they have been demonstrated to be effective. Systems and direct level work (discussed below) can be high or low risk.
Systems level approach
Systems level approaches, or systems change, aim to change part of a system that could benefit an entire population or group of beneficiaries and the way in which programmes, services and/or treatments are delivered. Examples include medical research, advocacy or policy change.
Something to keep in mind with this approach is that you often cannot see the full benefits until the change has happened. The change also takes longer to occur and the paths to success are more complex. Hence, the impact is not as tangible as with direct work (detailed below).
Taking this approach can be more or less risky. For example, funding advocacy or policy organisations with a strong track record of success working at a high level with government and other stakeholders could be considered lower risk. An example is the Coalition for Rainforest Nations (CfRN), an intergovernmental organisation focusing on preserving rainforests by working with rainforest countries to achieve more sustainable ways of economic development. CfRN introduced an initiative at the United Nations Framework Convention on Climate Change (UNFCCC), which was subsequently implemented into Article 5 of the 2015 Paris Agreement.
However, systems change is usually more high risk than the example above. It is difficult to know whether it will work and involves working with multiple stakeholders, complex issues, and diverse drivers. An example is Child Poverty Action Group (CPAG), a UK charity working to alleviate child poverty and social exclusion. One of their main objectives is to develop a comprehensive strategy with government to prevent and end child poverty in the UK. This carries a much higher risk of failing, but if successful, could help to eliminate the problem.
Direct level approach
Direct approaches are described as interventions delivering benefits, goods, and/or services to a specific group of beneficiaries. Examples include supplying free breakfast clubs or malaria nets. This approach usually has a more direct link between donation and effect, and may be preferred by some philanthropists as the impact is more tangible.
Choosing the path of lower risk involves supporting programmes with a high evidence base for their effectiveness. Direct interventions are also usually easier to measure using randomised control trials (the gold standard for measuring impact and effectiveness). One example is GiveDirectly, an organisation distributing cash transfers to tackle poverty in the Global South. Cash transfers have been evaluated by governments, non-profits, and researchers and shown to be more effective and cost-effective than vouchers or in-kind food assistance.
High risk direct approaches might include supporting new pilots or initiatives that are untested, and so lack an evidence base to know whether they work or not. This is considered more risky because their impact and effectiveness is not well understood.
Building your portfolio
Some argue that philanthropy should play a special role in the discovery and experimentation of new initiatives as society’s ‘risk capital’. This is because philanthropy can afford to enable innovation in ways that companies and governments cannot.
This being said, the scale of the social and environmental issues we face is vast such that government funding alone is insufficient.
Instead, when developing your strategy, we suggest considering your appetite for risk and how you want to support the causes you are interested in, and reviewing that strategy on a 3-5 year basis, focusing on fewer cause areas through longer-term support. You can then decide whether to continue supporting your initial organisations or cause areas, or whether there are new issues of interest to you.
When developing your goals, a few questions that may help you narrow down your interests might include:
- What do you hope to gain from your donations?
- Are you interested in supporting something totally different, or trialing something new?
- What are you most concerned about socially/politically and do you view your philanthropy as a way to alleviate that?
- What is your attitude to philanthropic risk?
- Are you interested in any particular cause area? Why?
For example, you may decide to apply a 40:40 ratio to your portfolio. If you decided to distribute £40,000 annually, £16,000 could be allocated to direct work and £16,000 toward systems change. Within each, you could decide how much to grant toward higher or lower risk approaches. The remaining 20% (£8,000) could be allocated toward personal commitments or reactive grants (i.e. emergency appeals) that do not necessarily align with your overall strategy.
Our Private Client team is always on hand and we can arrange a call with you to run through your philanthropic strategy. We have built a spreadsheet tool to help our clients build a philanthropic portfolio. Please ask your client manager if you would like more information.