Philanthropy is not (yet) an asset class. The “missing P” is…

It is a privilege to follow the keynote by Gillian Tan . “Maximal additionality with minimal conditionality” is the main mantra that I take away from her speech. (It resonates with the five safeguards against greenwashing that I’d outlined earlier).

I thought that before I slip into my neutral, moderating role on the panel, I should come clean about my own biases and show my hand.

As was mentioned in the kind introduction, I wear a few hats.

Unusually, I teach both sustainability and financial engineering to postgraduates in two separate departments. I convene senior executives from the private and public sectors, across east and west, on macro trends and risks.

However, before I became an academic, I was a professional in the world of financial markets.

So, I tend to approach this topic in the language of markets, supply & demand, derivatives and structuring – as opposed to the language of charity and grants.

Philanthropy is..

I’d like to motivate this panel with the provocation that Philanthropy is not the missing P here. Nor do I believe that Philanthropy is an asset class.

Philanthropy is an emotion, a passion, a motivation and mission.

It represents a “utility function” that places different weights on financial and non-financial factors and preferences for tangible and intangible outcomes.

But to give effect to all of that, you need channels and conduits.

So, philanthropy is not an asset class, but philanthropy-enhanced investment products can make up an asset class where assets are defined in the discipline of a marketable product and contextualized within the asset allocation framework of the asset-owner.

The missing P is..

The missing P, in fact, is PRODUCT: philanthropy-enhanced products.?

And when I say products, I mean both on the demand-side of funding and the supply-side of funding.

On the demand side, climate & nature projects need to be expressed as investable products. Turning locally diverse, idiosyncratic projects into investable products requires non-trivial expertise.

And on the supply side of funding, we need investing products - conduits, vehicles, and funds that can identify small projects (bottom-up) and aggregate them.

These projects might be individually risky but,

the act of providing early-stage funding deliberately designed as the equity tranche within a larger capital structure should reduce early-stage mortality.

Make “nerdy” great again.

To use even more geeky language, the conditional distribution of outcomes shifts in a positive direction because of the presence of a blended finance structure.

I’m afraid there is no way to escape the geeky or nerdy world of product structuring. In fact, we need to double down on design detail in order to achieve truly leveraged outcomes.

The concept of “blended finance” has been with us for some time. However, similar to essential oils, we need to dive deeper into the variations of blends.

We need to ensure that the contribution of philanthropy is material, additional and proportional.

Product design and Market design

Let us remind ourselves that our job here is to redress a pre-existing condition of market failure.

We know that there is both demand for, and supply of, funding for climate and nature solutions.

Simply convening the two sides may not create conditions of exchange. For that, we may need a bit more of engineering and a lot more of structural coordination. I commend both PAA and the WEF/GAEA for helping to do just that and thank ClimeCap for hosting this session. ????

The overarching question for us is not “What needs to be done?”; the question is, “Why is it that what needs to be done, does not get done?”.

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Text of opening remarks at PAS/ClimeCap/Ecosperity, April 2024

cc: Dean Collins Kitty Bu Gilles Pascual Jin Young Kim Mason W. Philanthropy Asia Alliance Yvonne Leung