Foundations typically make payout decisions using logic borrowed from finance. The underlying assumption is straightforward: over the long term, endowment assets generate reliable financial returns, while social returns are harder to see and quantify. The logic follows that to maximize impact, if the financial rate of return (Rf) exceeds the social rate of return (Rs), then it makes sense to preserve capital and limit annual payout to the IRS minimum, showing how undervaluing social return leads to under-deployment of philanthropic capital.

Philanthropy often measures social return by translating outcomes into monetary terms, using financial-style frameworks like social return on investment, cost-benefit calculations, or projected economic gains. These models assume that social value can be expressed in dollars and evaluated on the same terms as financial performance. Consequently, social return is calculated through the narrow subset of outcomes that lend themselves to dollar conversion.

The problem with this is that the ways in which we estimate social return are built on financial methodologies that cannot capture the full value of social change. As a result, Rs is routinely measured as a floor rather than a ceiling, while Rf is treated as a dependable benchmark. This asymmetry has profound implications: in attempting to quantify social returns in a financial framework, we systematically understate Rs and under-allocate investment in philanthropy in favor of retaining it in financial instruments.

In other words, payout rates remain low as grantmaking institutions place a premium, often without realizing it, on accruing financial return over investing in impact.

Undervaluing Social Return and the Exchange Rate Problem: Social Value Is Not a Financial Instrument

Finance works because everything shares a denominator. Social impact does not. Social value is produced through relationships, identity formation, community networks, and long-run changes in opportunity. This all unfolds in ways that cannot be meaningfully converted into dollars. Or otherwise said, there is no exchange rate between a thriving society and money.

This challenge is not unique to philanthropy; the legal system confronts it in torts cases like wrongful death: Juries must assign a number to the loss of companionship, potential, and unrealized influence. They do it because they must, but everyone understands the number is not the value. It is a symbolic placeholder for something that resists quantification.

Read the full article about the costs of undervaluing social return by Kendall Pettygrove at The Center for Effective Philanthropy.