The Chan-Zucker­berg so­lu­tion

Financial Mirror (Cyprus) - - FRONT PAGE -

When Face­book’s founder, Mark Zucker­berg, and his wife, Priscilla Chan, re­cently an­nounced their plan to de­vote some $45 bln in Face­book shares to­ward making the world a bet­ter place, some crit­ics wrote off the move as a pub­lic-re­la­tions ploy. They noted that Chan and Zucker­berg were not putting their shares in a char­i­ta­ble foun­da­tion, but rather into an in­vest­ment com­pany that can al­lo­cate funds how­ever it chooses – and that it can choose for-profit in­vest­ments.

Skep­tics also noted that in­stead of making an ir­re­vo­ca­ble le­gal com­mit­ment, the couple had only pledged to do­nate “most of their wealth” to the fund.

Ac­cord­ing to one mean-spir­ited critic, Zucker­berg was sim­ply mov­ing his “money from one pocket to the other” with a sub­stan­tial “PR re­turn-on-in­vest­ment [that] dwarfs that of his Face­book stock.”

The truth is quite dif­fer­ent. The strat­egy adopted by Chan and Zucker­berg, a com­bi­na­tion of tra­di­tional phi­lan­thropy and im­pact in­vest­ing, is ex­actly in sync with the most promis­ing trends in mod­ern al­tru­ism.

The defin­ing strength of tra­di­tional phi­lan­thropy is its abil­ity to take risks. Phi­lan­thropies don’t have to an­swer to pub­lic of­fi­cials or gen­er­ate re­turns for pri­vate share­hold­ers. That al­lows them to fi­nance bold, in­no­va­tive ideas. And, in con­trast to both the pub­lic and for-profit sec­tors, they can adopt a very long time hori­zon for prob­lems that re­quire decades to solve.

In many ways, tra­di­tional phi­lan­thropies op­er­ate like ven­ture cap­i­tal­ists. They might know that many of their projects will not pay off, but they are bet­ting that a few will turn out to be pi­o­neer­ing break­throughs, and that their suc­cess will spark pol­icy changes or at­tract larger flows of pub­lic and for-profit pri­vate fund­ing.

But phi­lan­thropy is only one way to ad­dress so­cial and en­vi­ron­men­tal chal­lenges. Im­pact in­vest­ing – a term coined in 2007 at a con­fer­ence spon­sored by the Rock­e­feller Foun­da­tion, one of the old­est tra­di­tional phi­lan­thropies – is an­other. Un­like phil­an­thropic donors, im­pact in­vestors seek both so­cial and fi­nan­cial re­turns on their in­vest­ments. Im­pact in­vest­ing not only broad­ens the pool of avail­able wealth; it fos­ters projects that will pro­duce self-sus­tain­ing re­turns.

In re­cent years, the money flow­ing into im­pact in­vest­ing has ex­panded rapidly, and the range of as­sets avail­able to im­pact in­vestors has grown to match. So­cial ven­ture cap­i­tal firms, which seek a “dou­ble bot­tom line” (healthy fi­nan­cial re­turns, as well as broader so­cial or en­vi­ron­men­tal ben­e­fits) are one of the fastest-grow­ing seg­ments of the ven­ture­cap­i­tal in­dus­try.

In North­ern Cal­i­for­nia, for ex­am­ple, the Bay Area Eq­uity Fund has in­vested $100 mln since 2004 in com­pa­nies such as Revo­lu­tion Foods, Pan­dora, So­larCity, and Tesla. All told, the fund es­ti­mates that those in­vest­ments have cre­ated 15,000 jobs and gen­er­ated an in­ter­nal rate of re­turn of 24.4%.

Big in­sti­tu­tional play­ers, mean­while, are be­com­ing sig­nif­i­cant im­pact in­vestors by pour­ing money into En­vi­ron­men­tal, So­cial, and Gov­er­nance (ESG) mu­tual funds. By one es­ti­mate, in­vest­ment in ESG funds has ex­ploded, from $202 bln in 2007 to $4.3 trln in 2014. A grow­ing num­ber of ESG funds are now di­rectly avail­able to re­tail in­vestors.

Even gi­ant pen­sion funds are ea­ger to en­ter the arena, and the US Depart­ment of La­bor re­cently made that eas­ier. In Oc­to­ber, Sec­re­tary of La­bor Tom Perez re­vised ex­ist­ing rules to al­low pen­sion fund man­agers to con­sider the so­cial im­pact of in­vest­ments as long as do­ing so does not com­pro­mise the man­agers’ fidu­ciary obli­ga­tions. A sim­i­lar 1978 rul­ing, al­low­ing pen­sion funds to al­lo­cate some of their in­vest­ments to non-tra­di­tional as­sets, helped fuel the growth of the ven­ture cap­i­tal in­dus­try.

Purely phil­an­thropic foun­da­tions face ma­jor con­straints. They are, in the­ory, al­lowed to act as im­pact in­vestors to make “pro­gramme-re­lated in­vest­ments” in projects con­sis­tent with their stated mis­sions; in prac­tice, how­ever, they face strict fidu­ciary rules that make them re­luc­tant to do so.

A grow­ing num­ber of foun­da­tions – such as the Bill & Melinda Gates Foun­da­tion, the Rock­e­feller Foun­da­tion, and the Kresge Foun­da­tion – are in­creas­ing their in­vest­ment in ac­tiv­i­ties that fur­ther their phil­an­thropic goals. Un­for­tu­nately, pro­gramme-re­lated in­vest­ments still rep­re­sent only 1% of the cap­i­tal de­ployed by foun­da­tions, with just 0.05% of that go­ing to­ward eq­uity in­vest­ments.

The Chan-Zucker­berg ini­tia­tive is a high-pro­file ex­am­ple of the rapid growth of so­cial-im­pact fi­nance that com­ple­ments and sup­ports tra­di­tional phi­lan­thropy. Chan and Zucker­berg will re­ceive no tax ben­e­fit from trans­fer­ring their wealth to a lim­ited li­a­bil­ity cor­po­ra­tion. But when they do­nate Face­book shares to a char­i­ta­ble or­gan­i­sa­tion, the re­cip­i­ent won’t have to pay cap­i­tal gains tax when it liq­ui­dates the shares and puts the money to work. And Chan and Zucker­berg will get a char­i­ta­ble de­duc­tion for the value of the shares at the time they are do­nated.

Mean­while, they will be free to use part of their for­tune as im­pact in­vestors in for-profit so­cial en­ter­prises that prom­ise both fi­nan­cial and so­cial re­turns (and they will have to pay taxes on the prof­its they reap). They can also choose to in­vest in ad­vo­cacy and even po­lit­i­cal ac­tiv­ity to en­cour­age change. This is ex­actly the ap­proach that many of this gen­er­a­tion’s ma­jor tech-based phi­lan­thropists, from Pierre Omid­yar to Lau­rene Pow­ell Jobs, are us­ing.

None of this is to say that the gov­ern­ment should re­lin­quish its own role in ad­dress­ing ma­jor pub­lic chal­lenges. For all their money, not even bil­lion­aire phi­lan­thropists like Zucker­berg and Gates can im­ple­ment so­lu­tions on a re­gional, na­tional, or global scale. But they can as­sume the up­front risks of de­vel­op­ing and test­ing new ap­proaches to tack­ling long-term so­cial and en­vi­ron­men­tal prob­lems. And then they can ad­vo­cate for pol­icy changes and pub­lic fund­ing to scale those ap­proaches that work.

In short, there is noth­ing wrong with pub­lic-spir­ited in­no­va­tion cap­i­tal. On the con­trary, its soaring pop­u­lar­ity sug­gests that it will be a cru­cial com­po­nent of twenty-first­cen­tury prob­lem-solv­ing.

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