Zero-sum giving: Will an incentive for social investment affect charitable donations?

Tax IncentivesIn amongst a slew of other things that needed doing over the summer, I found time over the last month or so to work with the social investment experts at CAF Venturesome to craft a response to the Government’s consultation on a new social investment tax incentive.

Incentivising social enterprise

This was issued by HM Treasury following the announcement in this years Budget that there would be a new tax incentive for private investment in social enterprise. The idea behind the consultation was to get the views of the social investment community on what form such a new incentive should take if it is to have the maximum possible impact.

 

CAF also took part in the joint submission made by the Social Investment Forum convened by SEUK, which covered a lot of the technical points in the consultation, so we decided in our own response to focus on a couple of key issues of particular relevance to CAF’s work. I want to focus on one of these issues in this blog – namely, what effect offering a new incentive for social investment might have on traditional philanthropic giving.

If you are interested in reading the full response, you can find it here.

Give money away or invest it?

Even before the possibility of a tax incentive was raised, some people had asked what impact the availability of social investment as an option might have on charitable giving. Would people who were interested in making social investments see them as a replacement for traditional donations or as coming from a separate pot? And even if they were seen as separate, would there be any adjustment of the relative size of these two pots?

 

It seems clear that if there was a situation in which someone could either give money away to a charity or invest it, with the hope of getting it back (possibly with interest), and achieve the same amount of social impact by doing so, then the latter would be a tempting proposition. If you throw into the mix an additional tax incentive to make such a social investment, then doesn’t the choice become obvious?

 

Obviously the situation is not quite like this in reality, as donors do not usually find themselves confronted by binary decisions about whether to donate or invest to achieve the same social outcome. What is more likely is that the overall balance of the money that an individual uses to achieve social outcomes might shift from donations to investments. Is this a bad thing, one might ask? Well, not in itself, no. However, if any increase in money being used for social investment is actually just money that would otherwise have been given in donations, then it is hard to see what purpose has been achieved.

Attitudes of the wealthy

There is little firm evidence so far on the effect that the availability of social investment as an option could have on donor behaviour. This is unsurprising when you consider that social investment has not been around at any sort of level for very long, and levels of awareness are still pretty low. A 2011 Nesta report looking at the attitudes of wealthy individuals towards various options for social investing suggested that they saw any money they would invest in these options as coming from a “separate pot” to their philanthropic giving or commercial investments.

 

However, the sample size was small so it is difficult to draw firm conclusions, and in any case this doesn’t really answer the question we are interested in: someone might view social investment as coming from a “different pot” to charitable donations but still adjust the relative sizes of their various pots so that their amount of philanthropic giving goes down.

 

There is some evidence that might be indirectly relevant, showing that other new method of using money to achieve social good (in particular cause-related marketing) can have a negative effect on levels of charitable giving. This suggests that we cannot be blase about the possibility that incentivised social investment might have a similar effect.

In conclusion

None of this means that offering an incentive for social investment is a bad thing- far from it. As one of the longest-standing social investors in the UK, CAF is fully in support of any move to develop the social investment market. What is important, however, is the recognition that social investment does not exist in a vacuum, but rather as one part of a complex system of funding for social good. And as such we need to be careful that positive interventions at one point in the system do not have unintended negative consequences elsewhere.

Rhodri Davies
Rhodri Davies

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