17th October 2024
The growth of trust-based philanthropy is changing the landscape of philanthropic giving; what does this mean for the sector, and what do you need to know?
The debate around unrestricted versus restricted funding is growing within the charitable sector, focusing on whether restricted funds limit charitable impact. Unrestricted funding is gaining popularity in philanthropy, driven by the rise of trust-based giving.
This approach trusts recipient organisations to allocate funds where they can create the most impact. A prominent example is Mackenzie Scott’s Yield Giving portal, through which she has donated over £17.3 billion in mostly unrestricted grants to charitable projects.
At Prism, we granted nearly £70 million last year alone, observing a mix of approaches to grant giving. These approaches are often shaped by the deep relationships our donors have with the charities they support and the nature of the work they fund.
But what does this all mean?
Restricted Funds:
Restricted funds are designated for a specific purpose, with assets required to be used within a reasonable time frame. For instance, a donor may allocate funds specifically for one or two key projects, such as an emergency appeal.
There are several reasons why a donor may wish to restrict their donation:
1. Specific Purpose: Restricted funding ensures that the funds are used for a specific purpose that aligns with the donor’s intentions. Leading to stronger relationships with donors who their contributions being used exactly as they envisioned.
For example, a donor can make a restricted gift when responding to a natural disaster or humanitarian crisis. Allowing them to allocate funds to specific geographical locations or group of people. Also by earmarking restricted funds, they can request reports to see how their gifts have directly impacted these events.
Restricted grants play a key role prioritising funding for smaller or less popular programmes. For instance, a donor may wish to support mental health interventions in their local school by restricting their donation.
2. Increased Accountability and Transparency: Since restricted funds are tied to specific uses, organisations are often required to report on how the funds were spent and the outcomes achieved. This increased accountability can enhance the organisation’s reputation and trustworthiness.
By setting parameters for the recipient, restricted funding requires more oversight and monitoring through the end-of-grant reports. This can create a relationship of trust between the donor and grantee and hold the charity accountable.
3. Attracting Additional Funding: Successfully managing restricted funds and delivering positive outcomes can attract additional donors who are interested in supporting similar projects or causes. It also demonstrates the organisation’s ability to manage funds responsibly.
Why restrict funding?
Overall, donors may wish to restrict first time gifts grants to organisations to build that sense of trust. Alternatively they could be looking to donate to a project which require more oversight or planning from the donors side. For instance larger scale projects or outside of the usual scope. In such cases, donors should work with a strategic advisor, or pass-through organisation. These advisors can helpfully review and ensure proper reporting at each stage so gifts are used most effectively.
Unrestricted Funds:
Unrestricted funds, on the other hand, carry no limitations and “are freely available to spend on any of the charity’s purposes” (Gov *2). Charities can use this to fund core costs such as IT systems which allow them to operate more effectively. Or to fund less attractive programmes which are equally important to achieving their charitable mission.
New philanthropy trends
According to the Third Sector Trends 2023 report*3, unrestricted funding in the UK increased from 46% to 60% between 2019 and 2022. This trend towards more flexible funding approach was without doubt influenced by the Covid-19 pandemic. This brought new challenges and higher demand for services. But also many funders are looking to donate more strategically, working closely to get to know the organisations they fund and then adopting a trust-based philanthropy approach. Whereby they trust the charity to utilise the funds in the most effective and efficient way.
The main benefits of unrestricted funding are as follows:
1. Increased Flexibility: Unrestricted funding can allow organisations to grow and develop in the way that they think is best, empowering charities to adapt to change, and shape their own projects and operations. This allows them to respond quickly to emerging opportunities, challenges, or gaps in funding.
During Covid, charities relied on this flexibility to overcome sudden socioeconomic and logistical barriers. As more people turned to their services and funding support.
2. Support for Core Operations: Charities can use unrestricted funding to cover essential operational costs, such as staff salaries, rent, utilities, and other overhead expenses. This is crucial for maintaining the day-to-day functioning of the organisation.
3. Long-Term Planning and Sustainability: Organisations with unrestricted funding, can plan for the long term, investing in capacity-building, infrastructure, or strategic initiatives. These may not be directly tied to specific projects but are vital for sustainability and growth.
4. Reduced Administrative Burden: Managing unrestricted funds typically requires less detailed reporting and tracking compared to restricted funds. This reduces the administrative burden on the organisation, allowing more focus on mission-driven activities.
Once that relationship of trust and accountability is established between the donor and grantee the donor may feel confident that they can send unrestricted funds. Reducing oversight or reporting requirements.
Trust-based philanthropy
Trust-based philanthropy often relies on donors and grantees to first build strong relationships. Donors need to feel confident that funds are used responsibly and for maximum impact. While charities want their expertise and experience to be valued and heard. If done correctly, these relationships can be incredibly valuable in empowering both parties and maximising charitable impact and output.
Restricted Vs unrestricted funding: Conclusion 
The debate between unrestricted and restricted funding reflects the evolving dynamics within the philanthropic sector. While restricted funding offers targeted impact and enhanced accountability, it can also impose constraints that limit an organisation’s ability to adapt and innovate.
On the other hand, unrestricted funding, championed by the rise of trust-based philanthropy and model’s such as Mackenzie Scott’s Yield Giving, empowers organisations with the flexibility to allocate resources where they are most needed, fostering long-term sustainability and innovation.
Ultimately, the choice between restricted and unrestricted funding should align with the goals, trust level, and strategic vision of both donors and organisations. By recognising that both approaches have their merits and can coexist to maximise charitable impact.
