Volume 58: Mission-Driven Investment Policies: The Impact of Aligning Social Values and Local Investing
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Frannie Reilly, Public Finance, Nonprofit & Corporate Law Attorney at McNees Wallace & Nurick LLC
As investment committees for nonprofit organizations review how funds (including endowment funds) should be invested, those committees need to consider the impact of those investments and ensure that they align with the missions of the nonprofit organizations. The mission statement of a nonprofit organization defines the purpose and the cause of the nonprofit organization. In addition, the mission statement helps to encourage volunteers, donors, and supporters.
“The closer an investment policy statement is to the nonprofit organization's mission, the easier it will be to explain to donors why donations to fund the endowment policy are important.”
As part of the investment committee's review process, an investment committee should determine whether the nonprofit organization needs to develop an investment policy statement to provide guidance to any investment managers about how these funds may be invested. The general investment rules are described in the investment policy statement, and the development of these rules must align with the nonprofit organization's mission. The closer an investment policy statement is to the nonprofit organization's mission, the easier it will be to explain to donors why donations to fund the endowment policy are important. With the concepts of environmental, social, and governance (ESG) screening playing a larger role in determining and shaping a nonprofit organization's investment policy, it is important to also consider local investing as a potential screening component to ensure alignment of the nonprofit organization's mission with its social values.
For example, if a nonprofit organization's mission statement is to promote and expand growth and jobs in Philadelphia, the investment committee of this nonprofit organization should consider adding a component of local investment in the investment policy statement. Suppose all of the nonprofit organization's investments are made in cities other than Philadelphia. A question arises whether there is alignment in the investment policy statement as established by the investment committee, as approved by the board, and the nonprofit organization's mission.
Fiduciary Duties
Board members have a fiduciary relationship with a nonprofit organization. As part of that relationship, board members participating in any investment activities on behalf of the nonprofit organization must consider these fiduciary obligations. The three main fiduciary requirements include:
Duty of care
Duty of obedience and
Duty of loyalty
A duty of care means that each board member must use the same degree of care, skill, and diligence that a prudent person would use in handling corporate affairs.
Duty of obedience means that each board member must comply with applicable laws, including strongly adhering to the Internal Revenue Service guidelines, while keeping the nonprofit organization true to its mission.
A duty of loyalty means that each board member must put any person or private interest aside and always act in the best interest of the nonprofit organization.
As part of these fiduciary responsibilities, board members need to ensure that their actions on behalf of the nonprofit organization align with its mission. A mission statement helps a nonprofit organization define its purpose, and the mission statement should be used when decisions must be made as to whether certain actions should be taken.
Investment Policy Statement
An Investment Policy Statement is the instrument a nonprofit organization's board uses to provide guidance and direction to any investment managers responsible for making decisions and recommendations on certain assets. The Investment Policy establishes clear and concise objectives and policies for investing the nonprofit organization's funds. In addition, it provides standards and guidelines to evaluate the performance of investment managers against the criteria in the Investment Policy Statement. With this Investment Policy Statement, a board may address specific issues identified by the nonprofit organization and establish certain screening protocols to ensure that investments either are or are not made on behalf of the nonprofit organization, which could be considered in furtherance of or opposed to the nonprofit organization's mission statement.
The key terms of an Investment Policy Statement include:
clear investment goals;
protect the nonprofit organization's assets through prudent management by only making quality investments;
provide specific benchmarks for the investment manager;
establish an asset allocation;
emphasize the importance of the safety of the principal;
evaluate on (at least) an annual basis the professional services performed by the investment manager;
describe the permitted investments by asset class; and
provide procedures for revisions to the investment policy and changes of investment managers.
Once this Investment Policy Statement is developed and implemented by the board, it should be communicated to the investment manager(s) to ensure compliance and adherence to the investment goals and permitted investments.
Socially Responsible Investing
Certain nonprofit organizations have incorporated the concept of socially responsible investing into the Investment Policy Statement as endowments have grown and nonprofits have been aware of how these investments are invested. Socially responsible investing is a consideration of the financial return and the social good of that particular investment. A board may establish certain positive screenings (i.e., social impact investing and shareholder advocacy by each company) and/or negative screenings (i.e., weapons) through the Investment Policy Statement. The screenings that the board selects to enact through the Investment Policy Statement will provide essential information to the investment manager in selecting the investments (i.e., stocks, bonds, mutual funds) for the nonprofit organization.
“The Investment Policy establishes clear and concise objectives and policies for investing the nonprofit organization's funds.”
The ability to align the nonprofit organization's mission statement and social values in making investment decisions ensure that the investment manager does not make investments that would not align with a mission statement. The investment manager must be aware of any concerns the nonprofit organization may have in making investments that may not align with the nonprofit organization's mission statement. Why would a donor donate to an endowment that contradicts the nonprofit organization's purpose? The board must consider this question in deciding whether to incorporate socially responsible investing into the Investment Policy Statement.
ESG Social Principles and Local Investing
With the increased focus on socially responsible investing, nonprofit organizations have begun to evaluate their investments based on ESG and social principles. ESG principles analyze a company's relationships with internal and external stakeholders. In conducting that analysis, an investment manager can identify companies' ethical and socially conscious efforts that align with the nonprofit organization's Investment Policy Statement and mission statement. Those social principles will then be incorporated into the Investment Policy Statement.
In following up on the example above, in which a nonprofit organization has a mission statement to promote and expand growth and jobs in Philadelphia, the board of that nonprofit organization must consider whether the investments being made as part of the Investment Policy Statement incorporate a local investment strategy. If not, the board should consider whether these investments align with the nonprofit organization's mission statement. If not, the board should review and/or revise the Investment Policy Statement to ensure alignment.
Conclusion
As the focus and attention of nonprofits and their endowments expand, it is crucial for board members to ensure that investments being made on behalf of nonprofit organizations are in alignment with their mission statements.
Frannie Reilly counsels nonprofit organizations on governance, financing, fiduciary duties, contract issues, compliance concerns, and general corporate reviews. In addition, Frannie is an adjunct professor at La Salle University (Masters of Science in the Nonprofit Leadership program).
Disclaimer: No liability is assumed with respect to the use of information provided in this article. The information is intended for educational purposes only and should not be considered as providing legal advice. Laws may be amended and court rulings made that could affect a particular procedure, issue, or interpretation that may be included in the article. Neither McNees, nor its authors, assume responsibility for errors or omission, nor any liability for damages resulting from the use of information contained herein. Please contact your attorney for legal advice.