Expanding one's philanthropic legacy by including Impact investing in their wealth planning strategy

The beginning of the year is an ideal time to assess your overall wealth plan and to plan for your family’s future and legacy.  Given the emphasis on the economic and sustainable challenges, intentional impact investments should be included as part of your overall wealth plan which will help create measurable and positive impact. Impact investing has disrupted this paradigm and provided new avenues for amplifying your philanthropic goals.

Traditionally, investing and philanthropy has served two separate purposes: namely invest to make as much money as you can without regard for its social or environmental impact; and dedicating more of the earnings and asset growth to philanthropy.

Sadly, most individuals who are contributing to social and environmental solutions under a carefully thought-out strategy continue to separate it from their wealth plan. The scale of the problems South Africa faces is significant and overwhelming. With the official unemployment rate at 31,9% in the third quarter of 2023, 55.5% of South Africans living below the poverty line and a Gini co-efficient of 0.67 indicative of the fact that we are one of the most unequal societies in the world. Delivering developmental solutions at scale and impact is key to creating employment solutions, clearing pathways out of poverty, and having effective climate adaptation initiatives that strengthen community resilience.

One’s isolated personal giving may be insufficient unless one works collaboratively and leverages each donated Rand for greater impact.  In this context, how can private philanthropists make their funds go further and be even more effective? 

Impact investing, a strategy that is characterised by an intentional positive social or environmental return together with a financial return, is a steadily growing field. Research from the Global Impact Investing Network (GIIN), an investor focused member-based advocacy organisation has determined that the assets under management in these strategies estimated as of the end of 2022, the current size of the global impact investing market to be $1.164 trillion, revealing its considerable growth in recent years. By some margin, most of the assets are being invested to in solutions that address challenges that Africans on the sub-continent face.  From affordable housing to quality education to water and road infrastructure, to banking for the unbanked, to last mile primary health care – impact investors are investing in innovative solutions to better serve people at the base of the economic pyramid.  At the same time, earning a financial return alongside their impact return. 

Increasingly, endowed philanthropic foundations and high-net-worth individuals and families are using impact investing strategies to ensure that every cent of their available capital is used most effectively toward their social and environmental objectives.  Even if they are not able to apply an impact investing strategy to their entire portfolio, they see it as an aspiration to seek alignment of their portfolio over time. For example, an investment portfolio cannot continue to invest in tobacco stocks when their philanthropic giving is designed to provide for the treatment of children with secondary smoke inhalation related illnesses.

While not fitting the pure definition of impact investing, these investing-for-impact approaches are a useful starting point to embark on a process that may lead there. Most importantly, make each Rand work harder for both a financial return and the desired social or environmental impact.   

As an individual or as a family, how can investing for impact be utilised in one’s approach? 

1. Use one’s investments to make an impact. Beyond personal giving, a starting point is to develop a social impact strategy for one’s giving.  One should ask what specific measurable impact do you want to achieve?  For example:  A change in the early childhood development (ECD) outcomes from informal crèches; improving the quality of agricultural farming production from emerging black farmers; supporting the capacity of an animal shelter to sterilise strays; or improving the quality of environmental protection of the country’s coastal reserves.  Once the impact outcome has been defined, it becomes easier to pull the same threads of that impact ideal through to all one’s broader wealth planning and investment activities.  In this way, you are expanding your impact intention. 

You must also consider your current investments.  Are there any that contradict the impact of one’s giving strategy in broad terms?  For example, if one has decided to support cancer research in personal giving but one’s personal investment portfolio or pension fund is invested in cancer causing commodities, does that make sense?  

This alignment to the mission is often tricky to implement.  Merely asking the question of a financial advisor or asset manager, sensitises them to one’s interest. Over the long term, constructive alignment changes can be made. 

2. Set up a foundation.   A constructive way to garner support from extended family and friends as well as the public at large, is by setting up a foundation that can leave a legacy that extends way beyond personal giving.  Depending on its structure and if funding objectives are aligned with the 9^th schedule of the Income Tax Act, it’s possible that a foundation could offer tax deduction rebates for donors.  As part of one’s estate planning, a personal/family foundation could be a way to donate all or part of one’s estate to, in this way leaving a legacy that lasts beyond one’s lifetime.  

If one does establish a foundation, ensure that it the investment strategy is aligned to that of the mission from inception. Depending on the size of the foundation’s investment portfolio, one can consider developing an Investor Policy Statement that specifically screens out investments that are contrary to the foundation’s mission. A mission aligned investment strategy can also be useful in determining what kinds of investments can be screened in and how the foundation acts as an active shareholder for equities that it chooses to own. In this way, all the foundation’s assets (both the investment portfolio as well as the grants) are aligned in furtherance of one’s philanthropic objectives.  Creating a philanthropy foundation as a vehicle to implement your and your family's philanthropy is the most effective way to ensure your objectives are achieved and your family values are transferred to the next generation. 

3. Giving your appreciating securities to foundations approved as Public Benefit Organisation (PBO) by SARS, you will effectively increase the amount of your giving and you can take advantage of a double income tax benefit. You will receive a tax deduction on the fair market value of the donated security and avoid paying capital gains tax on the security donated. You can also, elect not to donate your appreciating securities but only donate returns to an organisation approved as a PBO that is aligned with your objectives and still enjoy income tax benefits.
4. Build a single integrated wealth plan. Philanthropy undertaken as a family unit has a great impact in terms of transferring and installing family values to the next generation.  In doing so this will help in informing the level and quantum of resources that can be allocated to your philanthropy goals within your wealth plan. Wealth plan management involves a multitude of tasks and responsibilities that can be overwhelming. It requires that you understand and integrate tax, legal and investment advice into a cohesive plan that addresses your current financial needs while protecting future generations and also considers the environment in which future generations will grow up. Often just identifying and asking the right questions can sometimes be an insurmountable first step.

A little bit of preparation and planning can help you achieve your long-term wealth plans and legacy goals. Spending time early in the year to review and develop a wealth plan that addresses these goals holistically will help you make better decisions, avoiding mistakes and rushed decisions. By coordinating the development of a holistic wealth plan with your financial advisors, you will be better able to evaluate your financial condition, set long-term goals, and determine if the steps your advisors have implemented are achieving your holistic goals.

*Prince Siluma is Head of FNB Philanthropy.