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The Case for Catalytic Philanthropy

The Necessary Condition for a More Inclusive World.

The problem

Since the Industrial Revolution, capitalism has dramatically raised the standard of living around the world, particularly in China and India, but it has done so unequally. Today, 3 billion of the world’s poorest have as much wealth as the eight richest men on Earth.

Capitalism is geared towards the pursuit of profit as a default setting. What this means in practice is that capital naturally tends to find its way to lucrative markets (for instance, highly populated countries), profitable consumers (i.e. the wealthy and emergent middle classes), profitable sectors (such as technology and consumer goods), and profitable inventions and research (i.e. for those who can pay for it).

Those left behind are the 3 billion who somehow do not fit in the ‘profit-able’ ecosystem.

Poverty

The emerging consciousness

There is a growing global consciousness that capitalism has created negative externalities, i.e. costs suffered by third parties as a result of economic transactions. This ‘sense of wrongdoing’, now backed up by robust data on issues such as poverty and climate change, poses a threat to our economic system. So, the financial markets have gradually shifted towards a concerted effort to invest responsibly and moved along the impact spectrum to take an interest in clean energy, poverty, inequality, inclusion, gender, and more broadly a global agenda for survival and growth encapsulated in the United Nations Sustainable Development Goals (SDGs).

The fallacy of change and more of the same

The new flows of capital to address these externalities and work towards the SDGs – a shared global dashboard – is a positive step forward. However, capital is fundamentally profit-driven and is once again finding its way to ventures that do not serve those at the bottom of the pyramid.

Those left behind are the 3 billion who somehow do not fit in the ‘profit-able’ ecosystem.

In sub-Saharan Africa, current data shows that capital is being allocated again towards lucrative markets, sectors, segments – a case in point is fintech in Nigeria. Furthermore, those living in these selected parts of sub-Saharan Africa and Asia are increasingly perceiving the new breed of investors as neo-colonial agents, whilst local investments lag far behind. How can we close the gap between the inclusive discourse and the reality of capital allocation?

The solution: catalytic philanthropy

Amid the spectrum of capital, from development aid (with its often rigid, politicised imperatives – not to mention shrinking tendencies), traditional investing, ESG, and shades of impact investing – philanthropy offers a path forward.

Capital is fundamentally profit-driven and is once again finding its way to ventures that do not serve those at the bottom of the pyramid.

Philanthropy is not profit-oriented because it is, itself, the result of lucrative pursuits and liberal tax regimes. But philanthropy can — and should be — return conscious. One should ask: How many lives am I changing? How many social entrepreneurs can I support in finding solutions to poverty? How many may generate a return to support even more solutions? How many have failed, so I know I have embraced enough risk to invest in the world’s brightest and determined minds who dare imagine a more inclusive world?

These are the metrics of success in the emerging catalytic capital paradigm – these, and its ability to pave the way for the other forms of capital that do not take a primary interest in solutions for the poor without a quasi-certainty of profit.

As Bill Gates has explained:

Catalytic philanthropy has the high-stakes feel of the private market but can transcend the key market limitations: The investor doesn’t need a share of the benefits — those go to poor people or sick people or society generally, all of whom stand to gain earth-shaking returns from the kind of innovations that business and government likely won’t pursue unless philanthropy goes first. And once you’ve found a solution that works, catalytic philanthropy can harness political and market forces to get those innovations to the people who need them most.

My New Model for Giving – 8 October 2012 – Bill Gates

How can we close the gap between the inclusive discourse and the reality of capital allocation?

Measuring the success of a ‘solution’ is becoming more sophisticated and, most important, there is no need to recreate the wheel. The key is to fund organisations that do this well, and transparently. Human change is kaleidoscopic, but collectively, and with efficiency, human impact is multiplied over time, if the purpose is clear.

The new spectrum of philanthropic capital

The challenge of philanthropy today is therefore to understand one’s true motivations for giving, examine the data around the construction of a philanthropic portfolio and be ambitious about its expected ‘return’.

The majority of giving consists of ‘identity-giving’ (say religion or alma mater), followed by ‘social proof-giving’, what Harvard psychologist Steven Pinker describes as ‘appearing beneficent and generous’ or ‘earning friends and cooperation partners’. In some cases, these may overlap with ‘emotional response-giving’, such as donations made in response to natural catastrophes, humanitarian crises, epidemics, or disturbing storytelling.

A Typical Philanthropic Portfolio

A typical philanthropic portfolio chart

But philanthropy’s explosive and global growth, estimated by UBS at some $1.5 trillion globally, is in need of deeper questioning, to do its part to meet the estimated $5-7 trillion required to meet the SDGs. To its emotional dimension, a reason-based logic needs to be added. ‘Where will the philanthropic allocation do most good?’ This is hardly a dilemma for a rational mind. For instance, one can build a health clinic, but why not fund an entrepreneur that has the potential to treat hundreds of thousands of patients instead? So yes, we need more rationality in philanthropy.

A New Model Philanthropic Portfolio Allocation

A New Model Philanthropic Allocation

Whilst ‘long-horizon funding’ may focus on much-needed research, or endowments, fundamentally, catalytic philanthropic capital is different. It is ‘possible solutions capital’: solutions for the 3 billion, and beyond.

Catalytic philanthropy needs to be part of every philanthropic portfolio. It holds the key to unlock solutions created by negative externalities of an economic system that can do even better to serve us all, now and beyond.

Farahnaz Karim is a Harvard-educated social entrepreneur, political scientist, and humanist, with decades of field experience designing and managing development programs in countries such as Afghanistan, India and Kenya. She is founder and CEO of Insaan Group, a boutique impact investment entity that allocates philanthropic capital to tackle poverty.

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