Investment policies must align with a not-for-profit’s mission, rather than reflect the loudest voice in the room, writes Pitcher Partners’ Simon Montgomery.
The phrase ‘not-for-profit’ can elevate an organisation to a higher plane in the eyes of the Western Australian community.
Charities that tend to the less fortunate, organisations that raise money for medical care or research, clubs that provide a community service or professional associations that connect like-minded people – these groups are many and largely exist not to generate wealth but to provide a benefit for the greater good of society.
But with that dignified status comes greater scrutiny, and this is particularly true with bigger organisations.
In the same way that sportspeople are often seen as role models by the community, not-for-profits that live with an altruistic purpose must always be seen to do the ‘the right thing’ to earn patronage.
Society’s expectations of an organisation doing ‘the right thing’ in today’s world includes an examination of its environmental footprint, the social impact of its activities and having sound governance procedures.
Around the globe, a third of all professionally managed assets, or roughly $44 trillion, are now subject to environmental, social and governance (ESG) criteria.
With a hypervigilant community, sensitive corporate supporters and government funding sources, not to mention clients and patrons, NFPs have a wide range of stakeholders to appease.
ESG considerations are complex and not always easily measured, yet NFPs have not shied away from the challenge.
Indeed, many NFPs have been the driving forces behind community awareness of now prominent issues such as modern slavery and Scope 3 emissions.
They position themselves as watchdogs and advocates, while the organisation itself and its chosen cause is the beneficiary, as companies align themselves with good social causes.
But how heavy should this burden be?
Already, NFPs in WA and around the country face many challenges simply to exist and manage rising costs, attract and retain staff, and meet ever more stringent regulatory standards.
It is simple to suggest that a charity that provides support for people with a gambling addition would avoid investing in gaming investments. But should it also avoid fossil fuel investments by default, even if it restricts the investment options available at the expense of financial return?
Pitcher Partners just released its national 2022 Not-For-Profit Survey, which included a high response rate from WA-based NFPs.
Some 44 per cent of respondents stated that ensuring an investment approach aligns with the organisation’s mission was among their primary considerations for the development of ESG strategies to invest income. However, 11 per cent said the personal beliefs of those on the Board or relevant committees also played a leading role.
A strong framework of governance and process is imperative to not only manage risk but reduce the potential impact of personal bias that may influence the approach to investment. A considered and documented process is a defensible one.
Robust ESG policies allow an organisation to align investment decisions with its purpose or mission, rather than simply reflect the loudest voice in the room.
Pitcher Partners’ survey also revealed that while ESG is an important consideration for investments, there is an underlying belief that it leads to a trade-off in financial outcomes, which in turn has led to ESG ranking below the generation of returns in the list of the NFP’s priorities.
However, it shouldn’t be a case of one or the other.
It is imperative that an organisation’s board meets its mission both from a financial returns perspective but also through its ESG investment policy which should complement meeting the financial objective.
NFPs should have a sound Investment Policy Statement, ensuring that its ESG approach is workshopped and clearly documented, and those in relevant roles should keep up to date through education.
Policies should be regularly reviewed, and individuals on boards and committees should reflect on their ESG approach, to ensure their personal beliefs do not cloud their views when acting for the NFP.
Ignoring the communications piece is also fraught with danger.
ESG is an emotive topic, and an effective and proactive strategy for managing and executing communications to stakeholders is critical.
NFPs must be prepared for stakeholders to question ESG strategy, and those who can defend their policies and investment position give themselves a huge advantage in the ever-increasing battle for funding support.