Citylife, the UK charitable organisation, has helped to develop a financial tool known as a charitable bond, generating returns for investors and advancing important causes, such as construction of low-cost housing.

Citylife, the UK charitable organisation supporting social enterprises, has helped to develop a financial tool known as a charitable bond, generating returns for investors and advancing important causes, such as construction of low-cost housing in deprived areas. The organisation explains why it thinks this approach is worth the attention of high net worth investors.

Wealth creates opportunity. It allows those who possess it to choose the life they want to live – the house they buy, the clothes they wear, the entertainments they enjoy. But it also gives the chance to change the lives of others, to create a better future for those who have few opportunities themselves.

While everyone has something to give, there is a particular privilege in philanthropy which those with wealth can enjoy. And for those who wish to take up this opportunity, the key question is how their money should be used most effectively to create the greatest social impact.

The obvious answer is to give it away – the only consideration being to which cause it should be given. But a model of philanthropy built only on the basis of grants and donations is vulnerable to downturns and uncertainty in the economy.

At times like these, philanthropists may not only see reductions in their wealth, they may also perceive a higher level of financial risk and consequently feel less able to give.

There are however other financial models of philanthropy emerging. One such tried and tested tool is Citylife’s charitable bond. The bond allows investors to use their wealth for the benefit of others without having to give it away. Funds that have been put into a grant-making foundation can be used not just once but over and over again.

Money set aside for financial security, for retirement or to pass on to the next generation doesn’t need to be given away but can be kept safe and still be a force for good through a charitable bond.

The attraction of the charitable bond is that it is both effective and highly secure. About 20 per cent of the bond value is immediately given as a grant to nominated charities whilst the rest is loaned to develop affordable social housing.

The repayment of the loan plus interest over five years enables investors to receive their money back in full. Citylife essentially acts like a bank, pooling money from investors and lending it on at a margin above the rate the investor might get directly.

Furthermore, the beneficiary charity receives a single grant up-front, while Citylife, as a charity itself, receives the interest on the loan tax-free. In terms of security, the loan is made to an AA rated housing provider and assigned to an independent trustee – which means the investor’s money is just as safe as it would be in the average high street bank. There is the option of a further bank guarantee on the loan if required, and all the legal transactions are drawn up and managed through the pro-bono work of legal firm Linklaters.

One high net worth individual who has seen the benefits is Stelio Stefanou, former chairman of Accord. Stelio invested in a charitable bond through The Stefanou Foundation on behalf of unemployment charity Tomorrow’s People. “A charitable bond is a totally new approach to philanthropy for me,” says Stefanou, “but when you see it you wonder why nobody thought of it before! It helps my investment go further for Tomorrow’s People – meaning more lives are changed – so it made absolute sense to invest.”

It’s a sentiment shared by John Donaldson, former chief executive of Thomas Cook and investor in the East London Bond, which is supporting Bromley by Bow Centre and Community Links.

“Everyone tends to think of their money in different pots: spending, saving and giving. With the charitable bond, my philanthropy isn’t limited to my giving pot. It gives me a unique way of using my savings for charity as well.”

The charitable bond is creating another answer for how to give, but in parallel there is also increasing choice about who to support through this mechanism. From its early days of focusing solely on urban regeneration, Citylife is now branching out with bonds on behalf of causes from microfinance in Africa to the development of a world-class performing arts venue in Cambridge.

It is also seeking sponsorship to create a new online fundraising service, allowing a near limitless number of charities to raise funds through the bond mechanism simultaneously. With further developments in the pipeline, Citylife’s ambition is that one day the idea of investing for charity will be as commonplace as the idea of donating.