Charity as an investment

As a society we have a weird relationship with charitable giving.

I think most people want to make a difference to the world, at least to some extent. For those who don’t directly have the impact they want through their jobs, this often takes the form of charitable giving.

But all too often people talk about giving “to charity” in a vague way, as if every kind of charitable donation is the same. It’s almost taboo to talk about where you donate to, or to try to compare different charities. Obviously charities generally have good aims, but unfortunately none of us have unlimited resources and so it makes sense to think carefully about where we give.

Isn’t it weird that people make decisions in a very different way when they’re investing money (for their own gain) vs donating money (for others’ gain)? In a way these are really the same thing, it’s just that when you’re donating you’re investing for someone else’s benefit rather than your own.

In fact, viewing giving to charity as an investment can be a very useful way to think about things. When you start to view charitable giving as investing, two things happen:

  • A shift of emphasis from how much you give to where you give
  • A choice between giving money now vs investing money to give more later

I think it’s worth briefly exploring these two points.

How much to give vs where to give

When donating to charity, the amount we’re able to give will always be limited. It will be limited by our income, our living expenses, and potentially expenses for others who might depend on us. This amount will be different for each of us. Personally I try to make sure I donate at least 10% of my salary each month as soon as it hits my bank account, and occasionally make additional donations based on how much I can afford to give at the time.

But while how much we’re able to give is limited, we have complete control over where we give to. Just like with savings and investing. Imagine we have £100 to invest, and we’re given the choice between two investments:

  • Investment A: high expected returns, low variance (i.e. low risk)
  • Investment B: unknown (possibly negative) expected returns, unknown variance

Most people would rightly choose to put the full £100 in investment A, with higher expected returns and lower risk.

Now imagine we have a similar choice when deciding to donate £100 between two charities:

  • Charity A: high expected impact, low variance
  • Charity B: unknown expected impact, unknown variance

Even if these charities happened to focus on different problems, as long as we found a meaningful way to compare their impact I think we’d still like to give the full £100 to charity A.

But how do we find a charity like charity A? This is the idea behind GiveWell, who’ve made it their mission to help donors do as much good as possible by identifying those charities which can make the biggest difference with any additional donations. Their (short) list of current recommendations can be found here.

For anyone based in the UK, Giving What We Can makes it easy to set up a regular direct debit to one of these recommended charities, on which you can then collect Gift Aid (i.e. get full tax relief). This is how I’ve set up my monthly direct debit, which currently splits my donations across GiveDirectly, the Against Malaria Foundation, and Deworming the World Initiative.

Giving now vs giving later and the impact of compound interest

Why should we donate any money to charity now? Surely if we want to have a really big impact we should save that money, allowing it to grow exponentially through the benefits of compound interest, and donate a larger sum later?

That’s one way of looking at it, but it’s not the whole picture. First of all, while the amount of money might look like it’s increasing, it won’t necessarily increase in real terms (compared to inflation). And it’s not easy get consistent returns without some risk.

More importantly, this way of looking at things ignores the compound benefits of giving to charity. There are two angles here: making a difference through donations gets harder over time, and helping people now allows those people to help others in future.

As we solve problems through charitable donations, for example through eradicating malaria just like smallpox was eradicated a few decades ago, some of the most cost-effective initiatives (like distributing malaria nets) won’t be an option anymore. Because of this, making the same amount of difference will cost more money in the future – and by holding on to the money rather than donating it, people would have unnecessarily died from malaria in the meantime.

There are other compound benefits to giving to charity: by helping those in need, we empower them to continue to help themselves and others in a similar position. For example, a charity like GiveDirectly allows its recipients of cash transfers to make small initial investments or reduce their ongoing costs, helping them potentially dig themselves out of poverty forever. These kinds of interventions could have a lasting impact, and the sooner they take place the more impact they’ll have.

More on this

If you like the idea of making a difference, and you think the approach of viewing charity as an investment makes sense, I’d recommend reading Will MacAskill’s excellent book Doing Good Better. If you prefer reading shorter pieces, the Effective Altruism blog is a great place to start.

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