Charitable investments could help your charity

Introduction

As the economy remains challenging and public services face funding cuts, your charity may struggle to meet the needs of the vulnerable people you wish to support. With the cost-of-living crisis taking a toll on donations across the voluntary sector, it would be prudent for your organisation to consider supplemental streams of income.

A method that is becoming increasingly popular is charitable investments. With a clear strategy in mind, you can put your charity’s assets to work and ensure that it continues to thrive – even when hit by economic turmoil.

Why should your charity consider charitable investments?

The main goal of investing is to make the most of the funds afforded to your organisation. Charitable investments have the potential to generate better returns by making your money work harder. Investing can generate a reliable source of long-term income for your charity – offering a sustainable method of financing its activities.

While there are risks associated with investing (as markets can be unpredictable) letting your funds simply sit in a bank account runs the risk of having them lose their spending power over time due to inflationary pressure. If certainty of the value of the funds is not necessary, as they are not earmarked for imminent expenditure, investment assets can protect against the impact of inflation over the longer term. Your invested funds may be able to not only keep up with inflation but even outpace it.

Furthermore, your organisation can use its assets to support external projects that enhance your work. This can be accomplished by investing ethically and is sometimes referred to as ESG (environmental, social, and governance) investing. There are two main ways to invest according to your charity’s ethics: negative and positive screening.

Negative screening means that you do not invest in stocks and businesses that run counter to your organisation’s beliefs. Each charity is different so the trustees will have to decide which areas to avoid. Some common areas include firearms, animal testing, fossil fuels, and gambling.

Meanwhile, positive screening involves actively choosing to invest in stocks that support your goals. This could be because the business has a high ESG score or because it participates in similar objectives to those of your charity.

Start with your governing documents

Although all charities can legally invest, the majority of these investment powers are controlled by a set of governing documents. A well-made set of policies will let your organisation invest in a way that reflects its values instead of supplying funds to stocks that work against your aims.

An organisation’s Board of Trustees must have a strong understanding of these documents if they are to invest successfully. Even if trustees have prior experience, seeking professional advice can result in policies that are more appropriate and objective, based on a deeper industry knowledge.

One such policy should explain your organisation’s approach to cash reserves. Cash reserves are important as they are unrestricted funds that can be accessed when your charity faces difficult circumstances. Drops in income from challenges, such as political crises or large-scale projects, can be mitigated through sufficient savings.

Trustees should look to both prior and new governing documents to understand what they can and cannot do with the organisation’s funds.

The importance of an Investment Policy Statement

Before your charity begins its investment journey, trustees must curate an Investment Policy Statement. An Investment Policy Statement works alongside your existing governing documents to provide guidelines on the decision-making process for investing and how charitable investments should be managed.

The Investment Policy Statement should establish your organisation’s objectives and formulate a strategy to achieve them. Therefore, it should detail:

• Your charity’s main investment goals;
• who is allowed to make investment decisions;
• how often the portfolio and investments will be reviewed;
• the extent of your charity’s investment powers and the restrictions on them;
• predicted time horizons;
• liquidity requirements;
• how much income and/or capital growth your charity will require; and,
• if ethical or sustainable investments need to be considered.

Creating an Investment Policy Statement

When creating an Investment Policy Statement, the trustees should keep the following points in mind:

• Ensure that the investment strategy is suitable for your charity’s objectives;
• the portfolio and investments should be reviewed regularly;
• similarly, the portfolio and investments should be monitored;
• take professional financial advice to avoid mistakes.

Afterwards, start to curate the Investment Policy Statement by asking these key questions:

• What are your charity’s immediate financial needs?
• What is your charity’s income and expenditure?
• What are its long-term goals and plans?
• Does your charity have any future spending commitments?
• Are there any restricted funds?
• What do you anticipate the demand to be like for your charity’s services?

While that may seem like a considerable number of items to ascertain, this level of preparation will help to guide your organisation when making difficult monetary decisions. Without the direction provided by an Investment Policy Statement, you could be prone to making errors.

Moreover, the Investment Policy Statement will deliver an audit trail if your charity’s investment decisions are ever called into question. If your Board of Trustees follows the document, it will clearly show that any decisions were made for the benefit of the organisation.

How can we help you?