Next generation determined to make philanthropy more effective

Millennials and Gen Z are keen to put their wealth to use and take a more hands-on approach to philanthropy than older generations.

If first generation wealth creators favoured gifts and monetary contributions to implement charitable goals, next gen philanthropists have a much more active, entrepreneurial attitude to giving, with a focus on generating impact.

Their willingness to learn and collaborate with peers, as well as an interest in exploring innovative philanthropy structures, shows desire to make philanthropic work more effective.

At the same time, it provides a great opportunity for private bankers to educate, guide and engage younger generations, supporting their philanthropic journey.

“The philanthropy landscape is undergoing a transformative shift with millennials and Gen Z embracing a more comprehensive and hands-on approach to societal engagement,” says Frank Aalderinks, head of philanthropy at ABN Amro MeesPierson.

“Where older generations, Boomers and Gen X, typically solely contribute through financial donations, younger generations are driven to utilise their time, knowledge, and network in addition to financial donations,” he says. They want to give “in an entrepreneurial and results-oriented manner with measurable impact”.

 

Caring and sharing

“There is an increasing recognition by younger generation clients that there are many ways to support causes, not all financial,” confirms Jack Henderson, London-based associate director of family office business at multi-family office Stonehage Fleming. “Giving time to charitable causes by way of volunteering, or sharing expertise, is valuable, as is sharing networks for the benefit of charitable causes.”

Younger philanthropists want to generate impact “giving time, treasure and talent, combined with a mission and issue-focused approach, over and above organisation or brand loyalty”, states James Chen, Hong Kong based philanthropist and founder of Clearly, a global campaign aiming to bring universal affordable eye-care to the 2.2bn people globally with uncorrected poor vision.

“Next gens are digital, sector-agnostic, and willing to roll their sleeves up, including solving problems in partnership with others. But I don’t think anyone wants to be seen as the philanthropy ‘ATM’. And I don’t think anyone sees themselves as a saviour.”

Low hanging fruit

In the US, younger generations are more likely than older Americans to give their time, including mentoring and fundraising for non-profits, reports Dianne Chipps Bailey, national philanthropic strategy executive at Bank of America Private Bank.

Referencing the bank’s recent study on wealthy Americans, she reports that millennials and Gen Z are also “deeply interested” in learning more about giving. Nearly half of Millennials and Gen Z want to discuss philanthropy in initial conversations with their wealth advisers, even before developing an investment plan. Only a quarter of the older generation prioritise conversations about philanthropy over investments. (see charts below)

“This commitment to volunteer and interest in learning more about giving suggests that as their wealth increases in the future, the rising generation will give generously and strategically,” predicts Ms Chipps Bailey.

Philanthropy is, in fact, the low hanging fruit for private bankers to become relevant to younger generations. Bank of America recommends engaging children as young as four years old in giving, believing there are five stages of family philanthropy. To prepare rising generation clients to effectively give, advisers must begin by asking key questions to understand clients’ values, which is the “foundation for all successful giving plans”.

“These conversations are most productive when we create a safe, private space for our millennial and Gen Z clients to share, learn and grow,” says Ms Chipps Bailey.

But this may prove a challenging goal to achieve. While younger people indicate a “very high readiness” to take on and support philanthropic causes, only 50 per cent of older generations share this view. They are even less convinced that the next generation will be more effective in philanthropy than they are, though younger people are quite assured of their abilities (see charts above).

Moreover, the focus of next gen giving deviates substantially from older donors. Millennials and Gen Z are twice as likely to support organisations that provide resources to unhoused neighbours and those that advance social justice goals. They are also twice as likely as older donors to give to help the environment and address climate change, according to the study.

“Next generation philanthropists should be granted the appropriate level of independence to act,” says Stonehage Fleming’s Mr Henderson.

This can be done in a controlled manner when paired with the set-up of reporting obligations back to the family which helps establish responsibility and accountability of a family’s social capital, he explains.

Asia at the cusp

Private bankers can use philanthropy as a “very important strategy” to reinforce conversations across multi generations, believes Lee Woon Shiu, group head of wealth planning, family office and insurance solutions at DBS Bank.

“Private bankers should act as managers of the entire spectrum of the family legacy, which includes not only financial capital, but also human and social capital,” says Mr Lee, who is also board member of the DBS Foundation. Discussing issues of human and social capital, including philanthropy, ensures engagement with the family “at a much deeper level”, he says, leading the next gen members to continue to perceive the private banker as a “trusted adviser” even when the first generation passes on.

While lagging the Western regions, “Asia is at the cusp of embarking on the philanthropy journey”, with the next gen showing a “strong interest” in philanthropy.

Moving away from “emotion-driven” giving, often linked to writing a cheque for a specific charity, second generation members are “more passionate and focused on causes”, which are much broader-based, and want “data and numbers” to assess the overall impact. Their process of giving is much more structured than before, with “a lot more” due diligence carried out on causes before they commence giving.

Younger donors are also keen to connect with “like-minded entrepreneurs” and as a wider, often cross-border community, eager to take a ‘moonshot’ approach to innovate and amplify the extent of the philanthropic efforts.

Technology will also play a key role in philanthropy, says Mr Lee, envisaging a not-too-distant future where tech-enabled platforms could allow donors to connect with each other, address global causes and increase their impact.

In the philanthropic space, “moonshots can bring focus and commitment to a world where capital fragmentation and insufficiency are rife and where everything is important, which can mean nothing is prioritised”, explains philanthropist Mr Chen.

“Moonshots are the pursuit of ambitious, high-risk goals, typically over many years, to achieve large-scale systematic change. That requires bold philanthropists with a long-term vision and commitment, a willingness to learn and collaborate, and a relentless focus on the problem,” he says.

Embracing failure

However, this is not an approach for the “faint-hearted”, particularly as the moonshot approach can challenge the status quo. “Any approach that takes risks must embrace failures along the way, so you have to be comfortable with dead-ends and disappointments.”

Moonshots require “long-term commitment” and “very patient capital”, although milestones can help satisfy demands for impact, explains Mr Chen.

This is an area wealth managers can easily step into. Advisers should educate the next generation “to be tolerant of risk and understand that potential failure is part of risk”, adds Stonehage Fleming’s Mr Henderson. “Trying and failing may seem counterintuitive but are effective ways of identifying and understanding further opportunities.”

More broadly, bankers need to help donors navigate the myriad choices they face when starting or scaling up private giving and engage and guide them through different routes they can take.

They also need to bridge the gap between philanthropists and charities, from which next gens increasingly want more transparency, says ABN Amro MeesPierson’s Mr Aalderinks. They must provide a network with like-minded people, inspiration and examples, allowing them to learn from experience.

Importantly, they must offer them tailored advice and impact insights, making available a range of instruments, be it impact investing, ESG investing, venture philanthropy or charitable donations. “I see the next gen opting more and more for a combination of tools to make a positive difference,” he says.

Amplifying impact

In fact, “next gens want to look at risk, return and impact across the spectrum of capital,” explains Tom Hall, global head social impact and philanthropy at UBS. This is in contrast with older generations, more likely to keep different pots of capital – one for profit, one for philanthropy, and sometimes one for impact.

Moreover, among younger cohorts in particular, there is greater interest in innovative philanthropy structures. These may include income share agreements, impact loans where the interest rate changes depending on the amount of impact received, or payment for results contracts.

In practice, these contracts are structured with counterparties, including governments willing to pay for impact generated. This allows donors to grow philanthropic capital and amplify their impact.

One example is the philanthropic grant funding research at Oxford University for the Covid-19 vaccine, which took an intellectual property (IP) revenue share in the future vaccine sold by AstraZeneca and was then replenished.

In the field of education, instead of granting scholarships, individuals can lend money to students at low interest rates. Carbon markets are another interesting field, with payments offered to individuals for carbon sequestration. “People are starting to be aware there’s revenue for impact, and governments might pay for it,” says Mr Hall.

This new approach reflects “growing awareness” among both older and younger donors that philanthropy alone is not enough to solve global challenges and that through these new structures philanthropists “can get a lot more impact from their capital”, he says.

The value of philanthropic assets in the world today amounts to $2tn, set to increase to $11.9tn by 2045, according to estimates by Cerulli Associates. This is the result of significant wealth creation over the past three decades, combined with first gens’ widespread conviction to allocate a growing chunk of assets to their “legacy bucket”.

But philanthropic capital is dwarfed by the $30tn needed to meet the UN Sustainable Development Goals or the $50tn required for transition to a low carbon economy.

Catalytic capital

Forward thinking philanthropists are applying a “business-minded mindset to philanthropy to scale things up, so they can solve these $50tn problems”, says Mr Hall.

Banks such as UBS, he adds, can play a key role in structuring instruments, which can prove difficult to arrange by individual philanthropists or foundations, particularly if their counterparties are governments.

“Philanthropy at its best is innovative, catalytic risk capital, and proving out new pathways. But those pathways must be scaled by public procurement, ultimately. It’s a kind of exit strategy in partnership with government, which can become quite sophisticated.”

The key challenge is that donors must give up control and partner with others. “One of my favourite quotes from a philanthropist, is that ‘if you really want to be successful in your philanthropy, you’ve got to take your name off it,’” says Mr Hall. “I feel that next gens are bringing that humility.”

These innovative, results-based financing structures require “much more robust impact measurement”, which can prove challenging. Private bankers should try and help educate clients on “what impact looks like and how it can be measured simply”, he says.

UBS applies an impact rating, similar to a bond rating, to any capital allocated on behalf of its clients. “Investors need to be able to make the call between risk, return and impact,” he says, stressing the importance for organisations that receive capital to prove the impact they are achieving.

“The pool of philanthropic capital available to humanity over the next 15 years is maybe a once in a century opportunity,” he believes. “If it’s invested smartly, with a real razor-sharp focus and impact, it can genuinely catalyse innovative and scalable solutions to these big social and environmental issues. That’s going to be driven by the next gen.”