For not-for-profit (NFP) boards and their governors, mission aligned investing can play a beneficial rule in advancing organisational goals. So why is it important, and what steps can leaders take to achieve alignment?
Why does alignment matter?
For many Not-for-profit organisations (NFPs) a unique opportunity may exist to leverage their investments to advance their values and mission – and effective execution is crucial. By aligning their investment portfolio with their purpose and mission, NFPs can:
- Demonstrate their commitment to social and environmental impact
- Enhance their reputation and credibility
- Potentially attract more donors and supporters.
What role do governors play?
Boards are often the key decision-makers that drive the strategic outcomes for an NFP, They are responsible for setting the strategic direction and overseeing governance and management. As such they play a crucial role in ensuring that an organisation’s investment portfolio aligns with their values and mission.
Some of the actions that governors can take to achieve alignment are:
- Define the values, mission and strategic intent of the organisation
- Develop and regularly review an Investment Policy Statement (“IPS”) that guides the investment decisions and practices with alignment to the values and mission of the organisation .
- Define and develop appropriate negative investment screens (companies or sectors to be scoped out)
- Ensure asset consultants and fund managers are fully engaged with the IPS and its alignment to mission so they are accountable. Establish expectations and protocols for them to monitor and report on with alignment to the mission.
- Communicate the approach and challenges to the stakeholders, as well as seeking feedback .
What are the challenges of alignment?
While alignment can bring many benefits to NFPs, it also presents challenges.
One significant challenge is the use of indirect investments, such as pooled funds or index funds. Although these may report effectively and align on Environmental Social and Governance (“ESG”) factors, the funds values and mission may not be reflected by all organisations they invest in. For example, an NFP that supports environmental causes may be invested in an index fund that holds companies involved in fossil fuel extraction or deforestation. To avoid this, NFPs must have a process to understand the underlying strategies of all investment managers.
Another challenge is greenwashing, – making misleading or unsubstantiated claims about the environmental or social impact of an investment. To prevent this, NFPs should ensure their asset consultants and fund managers have a sound process to verify claims and investigate those funds being utilised.
A third challenge can be the trade-off between alignment and diversification. Diversification is typically at the very core of sound management and risk control. If the restrictions placed on allowable investments are too great, this can limit the diversification options and result in unintended concentration risk. To balance this, NFPs should seek professional advice and consider the long-term implications of their alignment decisions.
What are the benefits of communication?
Besides aligning their investments with their values and mission, NFPs can also communicate openly with stakeholders around their investment approach and the impacting decisions, to enhance fundraising and community engagement. This transparency, helps to build trust among stakeholders.
Aligning investments with the values and mission of the NFP is crucial to show commitment to the overall cause. Overcoming challenges like managing indirect investments and avoiding greenwashing requires systematic diligence and strategic communication. This alignment can boost NFPs’ reputation, attract more support, and enhance financial performance, helping to further deliver on their values and mission.
The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances
