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Growing Up Global, Part 5: Innovation Marks Europe’s Robust Philanthropic Growth

By Tom Watson on June 4, 2008No Comment

Europe's Robust Philanthropic Growth by Susan Raymond (part 5) 

For many, many decades conventional wisdom taught that Europe’s reliance on government support for all manner of social services and social safety net systems would make moot the development of robust philanthropy.  While individual commitment to neighbor, and commitment to charity at the micro level, had been and would always be fundamental parts of European culture, the evolution of private philanthropy at scale — i.e., as a fundamental part of the revenue strategy for financing institutions on the societal commons and as an expression of significant community leadership — would be unnecessary, and indeed counter-intuitive.

As usual, conventional wisdom has fallen short of the mark.  Philanthropy in Europe is growing at a rapid clip, not simply spreading throughout societies, but innovating at the level of leadership, developing new approaches to resources transfer in the nonprofit sector and, in many ways, eclipsing theory and practice in the U.S.

Let us begin with the reasons for the growth, and then illustrate the innovations.

There are three core causes for the robust health of philanthropy in Europe today.  Not all are equally influential in every nation, but all play a role. 

The first, of course, is wealth.  Financial services provide an example.  European investment banking, sales and trading revenues totaled $98 billion in 2005, closing in on the $109 billion in the U.S.  From 2001 to 2005, London’s financial services workforce grew by 4.3%; New York City’s declined by 0.7%.  Europe is home to a larger share of innovative finance (e.g., derivatives) than the U.S., and the pace of growth of equities, private debt and government debt and bank deposits in Britain is outpacing that of the U.S. 

If wealth is the supply side to the philanthropic trend, what is the demand side?  Working together, two factors combine to seed the demand for increased philanthropic roles, aging and globalization.  Europe is getting old.  By 2050, the median age in Europe will be 52.3 years, up from 37.7 today.  In Germany, 12% of the population in 2050 will be over age 80, compared with 2% today.  The effects on the economies of Europe will be real and painful.  By mid-century, every German worker will need to support one retiree.  In these situations, economies cannot reinvest in productive capacity because resources are being siphoned off to support the dependent population which, because it is old, is more expensive than the child-dominated dependency of 50 years ago.  Enter globalization.  With emerging economies competing for global markets and the prices of goods falling, an aging population with expensive dependency presents Europe with competitive challenges.  If it cannot reinvest in its productivity, and if it cannot reduce taxes to make its products competitive and its investment climate attractive, then it faces a downward economic spiral.

So, we have growing wealth in parts of the European economy and growing demographic and cost pressure among its people.  This sets the conditions for, but is insufficient to create, the current philanthropic growth.  Public policy, therefore, is the third and in many ways igniting factor in the current burst of major philanthropy.  Policy forces have been of three types.  First, and in part a cause of wealth creation, the past twenty years have seen a re-emphasis on private markets and entrepreneurial initiative.  This has provided the energy for economic growth.  Second, in order to ensure that market policies result in sustained economic growth, social policies — Europe’s famous cradle to grave social welfare systems — have been slowly unwound.  And, in turn, tax and other policies have been brought on stream to encourage the strengthening of private philanthropy for these very systems.  In Spain and Ireland, tax policy has created U.S.-type giving incentives.  In Britain, both tax policy and higher education finance policy, which now requires the development of private voluntary sources of support, have provided the impetus to fundraising in higher education akin to that in the U.S. In Germany, policy pressures have been in similar directions.  In Hungary, Poland, Slovakia, Romania and Lithuania, “percentage laws” enable tax payers to designate a percentage of their previous year’s income tax payment to a social service organization, resulting in the strengthening and popularization of philanthropy.  Europe-wide, on December 7, 2007, the European Commission launched the European Forum on Philanthropy and Research Funding to encourage private voluntary support for research, long a focus of government budget commitment.

So, charity’s deep roots in European culture are being fed by wealth, need, and policy change to nourish a rapidly and often wildly blossoming tree of philanthropy in Europe.

But that is not the most interesting part of the story.  The more interesting part is the degree to which, unencumbered by a hundred years of tradition in what “philanthropy” means, Europe is on the cutting edge of innovation in moving private voluntary contributions to the societal commons.  A few examples will make the point.

Incorporated in 2001, Britain’s Charity Bank is both a nonprofit charity and a bank authorized by the Financial Services Authority.  Among its other activities, the Bank offers a tax-free savings account where 100% of the funds (deposited as well as interest) will be used for charitable purposes. 

Another variant is the Private Equity Foundation, established in Britain, with the belief that there are very strong parallels between the private equity disciplines that help build capable and results-focused companies, and those that help build successful and effective charities. PEF takes the best of private equity expertise and resources, and applies it to build stronger and more effective organizations in the charity sector.  Each investment candidate comes before the PEF Board for approval. Once approved, its performance will be monitored on a quarterly basis by the Board. Charities would typically remain in the portfolio for three years. PEF has a primary investment focus on the UK and a secondary focus on other parts of Europe.

Social venture funds such as the Impetus Fund in the UK, Bonaventure in Germany, and the Media Develop Loan Fund in the Czech Republic are blending for-profit and nonprofit interests and funding mechanisms, developing equity-type instruments for moving resources on the societal commons rather than relying on traditional grant-making.  In turn, this brings the charitable fund managers, most of whom come from private finance, deeply into the management of nonprofits, thereby transferring systems and skills akin to those in commercial sectors.

This business approach, of course, has its problems, not the least of which is the ability of small or fragile nonprofits to access this innovation.  While organizationally weak, these can also be the nonprofits who are closest to community and hence deeply valued in problem solving.  Ensuring that financial innovation that drives to scale does not disenfranchise community commitment to solving its own problems will be a critical challenge in Europe, as it will be in the U.S., as philanthropy grows and redefines itself.

Sources

J Anderson.  U.S. Financial Sector is Losing its Edge, Report Says.  International Herald Tribune, January 22, 2007.

“Is Europe Poised for a Golden age of Community Philanthropy?” in S Raymond, The Future of Philanthropy: Economics, Ethics, and Management. New York: John Wiley and Sons, 2003.

European Forum on Philanthropy and Research Funding.  Conference Report.  December 4, 2007.  Brussels, Belgium

R John.  Venture Philanthropy: The Evolution of High Engagement Philanthropy in Europe.  Said Business School, Oxford University, June 2006.

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