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Symposium 2009

Proposal - New Capital For Social Investment

The Challenge

In the aftermath of the collapse of the western financial system, many observers agree that neither unfettered financial markets nor invasive regulation are able to ensure that financial and busines ...

In the aftermath of the collapse of the western financial system, many observers agree that neither unfettered financial markets nor invasive regulation are able to ensure that financial and business leaders will necessarily act in the public interest.

There is an obvious source of significant new capital that governments could create for social investment without having to put the money up themselves or issue any new tax credits (which given the world’s current economic challenges new funding and additional tax credits are hard to come by). That source is in private foundations.

The current way most private foundations are organized and regulated in developed countries is they are required to donate or grant only somewhere between 3 and 6% of their assets in any given year to charities. The other 94 to 97% of their assets are generally handed over to investment management companies who invest that money in very traditional investment instruments that have no social purpose whatsoever and are not linked in any way to the mission of the foundation.

This makes no sense to me from a couple of different perspectives. First of all if the purpose of foundations is to do good how can any foundation live up to their potential if they only harness 5% of their assets to further their mission? Try and think of any other organization in the world that only uses 5% of its assets in pursuit of their goals. I can’t think of any.

Second, I think this current way of operating is a terrible deal for taxpayers and governments. In many cases governments give up to a 50 cent on the dollar tax credit for an individual to start a foundation and only require that 5 cents on the dollar be put back on an annual basis to do societal good. That seems like a pretty poor return on a taxpayer dollar to me.

A simple solution would be for governments to require that foundations invest at least 10 percent of their assets in social investments. Obviously some thought has to be put into what constitutes a social investment (it doesn’t mean an ethically screened conventional investment) but I don’t think that would be very difficult. Frankly I believe the number should be higher than 10 percent but that’s a good starting point. That requirement alone would create a capital pool of tens of billions of dollars which could be dedicated to affordable housing, micro-finance, social enterprise, green energy etc. And most importantly it would not cost the governments any money.

 

Bill Young

Social Capital Partners

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