Every day, nonprofit organizations positively impact the communities and causes they serve – why shouldn’t their investments do the same?
Nonprofits face unique investment challenges. On one hand, they must preserve the capital in their endowment and produce income for daily and other near-term working capital needs. In fact, it’s part of the board’s fiduciary responsibility to do so. On the other hand, they are laser focused on advancing their philanthropic mission, and where they invest their funds can amplify the impact of their important work.
New investment strategies are making this more achievable than ever before. An increasingly common approach is to use “Socially Responsible” funds that filter out investments in companies that do wrong by the environment or certain groups of people. Screening out companies that do not align with your own is a good place to start, but it doesn’t ensure your investments are working toward the same goals as your organization.
Instead, a more proactive approach to selecting investments that incorporates thorough research and engagements with corporate management teams is required to truly advance a nonprofit’s mission. Doing so in a way that adheres to a nonprofit’s investment policies and working capital needs can be challenging and requires a high level of expertise and experience in the market.
At Haverford Trust, we’ve developed a 2-step process to achieve this alignment. Once you’ve determined your working capital needs, here is how you can maximize your impact through your investments:
Step 1: Identify your core values and priorities and determine which investment approach fits
Although every nonprofit’s guiding values are different, the path to identify them is the same. Every nonprofit has a mission statement that outlines the purpose of the organization, which serves as a great launching point to home in on your core values. Your team may be focused on supporting the local economy, improving education, or any combination of goals.
Start by thinking about the outcomes you are trying to achieve and what values are guiding those objectives. The idea is to find the values and priorities embodied within your mission statement. Try brainstorming a longer list, then narrow it down to between three and five core values. Don’t forget to engage with those involved at all levels of the organization, from the Board of Directors to volunteers.
Once you’ve identified your core values, you can start exploring what type of investing strategy you want to consider. Exclusionary approaches, such as Socially Responsible Investing, exclude certain companies or industries from your investment portfolio. This can help align your investments with your values, but it doesn’t necessarily help advance them. Environmental, Social, and Corporate Governance (ESG) investing takes both positive and negative attributes under consideration, providing an avenue to invest in companies working toward your same goals.
ESG also acknowledges that relevant environmental and social factors can impact a company’s bottom line. A business with a large workforce, for example, will reduce costs on recruitment and training by treating their employees well and improving retention. That means the right money manager can find investments that fit your values without increasing risk. In fact, a growing body of research actually shows that ESG strategies often help reduce investment risk.
Step 2: Partner with an experienced, ESG-oriented investment manager
When evaluating money managers, there are a few qualities you should look for to ensure the relationship is a good fit. Given the unique financial needs of nonprofits, the first criterion is experience working with mission-based organizations. Experienced managers will be the most adept at balancing your working capital needs with long-term growth prospects.
Equally critical is a robust ESG program that goes beyond exclusionary approaches. Look for an investment manager that integrates ESG data into their investment selection process and engages with companies on ESG matters.
This engagement with corporate management teams can be a critical differentiator. Asset managers are in a unique position to promote change because, as long-term shareholders, their financial interests are aligned with those of the companies in which they invest. Companies understand that, and as a result they value and incorporate investor feedback on ways to improve their environmental and social profiles. As such, engagement is an effective tool to promote better corporate behavior and broaden your organization’s impact.
Putting a plan in action
With new financial products, investment wherewithal, and innovative thinking, nonprofits today can put their investments to work in ways that benefit the issues and causes most important to the organization while also preserving and growing their capital. Doing so doesn’t need to be a challenge. Competent investment managers with deep relationships in the market and experience advocating for their clients can handle most of the heavy lifting. Nonprofits merely need to find a partner that is willing to listen, understands their values, and is willing to fight on their behalf.
