Managing Charitable Dollars

6.  Charitable Investments – Defining Your Values

An investment policy statement (IPS) is the roadmap a Board uses to manage and spend the organization’s funds. And a well-drafted investment policy statement will align the Board’s fiduciary duties (see Topic #1) and the legal requirements for managing charitable dollars (see Topic #5) with the values that are specific to the organization and the impact it hopes to have.

If you are writing (or updating) your IPS, below are questions and tools to assist your Board in defining the organization’s values and writing an investment policy statement that will guide the Board – and future Board members – in managing and making the most of the organization’s charitable dollars.

Considerations for an Investment Policy Statement

As discussed earlier, a Board’s primary responsibilities are approving the organization’s budget – how much it will spend each year – and investing and managing the organization’s assets to support its mission. An IPS will guide the Board in these responsibilities. Topics that are typically addressed include the following.

  • People and Roles: Who will play a role in managing the investments and what is the extent of their responsibilities? Will it be the full Board, a committee, one or more officers, and/or outside investment advisors? What level of involvement or role will each have?
  • Investment Objectives: What are the short- and long-term goals for the performance of the investments? What are the Board’s risk and return strategies for different asset classes? What is the time horizon or how long is the expected timeframe for assets to be invested? Some factors that may impact the investment objectives include the organization’s charitable mission, goals, activities, budget, and cash flow needs.
  • Asset Allocation: How will the charitable dollars be divided among different categories and types of assets? The purpose of asset allocation is to ensure the nonprofit can carry out its goals, fulfill legal requirements, manage risks, and drive impact. Asset allocation is an opportunity for the Board to consider the organization’s values and the desired impact, as well as the size of the organization; its time-horizon; tax consequences, if any, of certain investments; and, if applicable, special relationships assets may have to the organization. In addition, the Board should consider the process for periodically reviewing asset allocations and rebalancing the portfolio.
  • Evaluation: How will the Board evaluate the performance of each investment and the portfolio as a whole? What are the applicable benchmarks to use? Deciding upon appropriate benchmarks and gathering the data is an area where the expertise of outside financial advisors will prove invaluable.
  • Spending Policy: What is the percentage of the value of the invested charitable assets that can be spent each year to allow the nonprofit to achieve the impact it seeks? The IPS should provide guidance on how much the organization can spend – on grants, programs, and operations – from its investments annually, with the balance of the expense budget, if any, coming from other sources. Remember that in Pennsylvania, Boards electing a total return investment policy can elect to spend between 2% and 7% of the assets annually (see Topic #5).
  • Impact Investing: What types of impact investments will the Board pursue and what activities will the nonprofit engage in? To answer this question, the Board may need to answer other questions first, such as: what resources will be contributed to an impact investment strategy? Will investments be limited to dollars or does the organization have capacity for more involved oversight, relationship-building, and engagement? For private foundations, will the investments be used to help meet the 5% annual pay-out? The IPS will use the answers to these questions to provide guidance on investments and activities that align with the organization’s mission and values. (See Topic #4 for specific impact investing activities to consider.) During the discussion phase, it may help to consult with legal, financial, and investment advisors or to reach out to peer nonprofits, particularly those with impact investing experience, to learn more about what strategies and tools could be right for the organization.
  • Other Policies and Considerations: Are there other policies or considerations specific to the organization that may impact future investment and spending decisions? For example, if the organization holds donor-restricted funds or if the Board has adopted a policy on accepting them, the IPS should address those issues and provide guidance.

Download our Investment Policy Statement Board Discussion Guide and our Impact Investing Board Discussion Guide for tools to facilitate Board discussions, draft policies, and make decisions.

Steps for Adopting An Investment Policy Statement

Once the above decisions have been made, the actual steps for creating and adopting an IPS are fairly straightforward.

  1. Create a written document to memorialize the Board’s decisions around the above discussions, the organization’s values, and the investment strategy and objectives. Work with your advisors to draft terms specific to your organization and goals. Or, for help getting started, see our Investment Policy Statement Board Discussion Guide.
  2. Confer with legal counsel on compliance issues and, if they have been retained, with investment advisors about financial goals and desired impact. Update the IPS, if needed, to incorporate advisors’ comments.
  3. Adopt the IPS at a Board meeting. See our Sample Board Resolution Adopting an Investment Policy Statement.
  4. Share the final IPS with legal and investment advisors. If new investment advisors will be engaged, ensure they have experience with and a commitment to impact investing if it will be a part of the investment strategy. See below for a toolkit to help source and select investment advisors.
  5. Document decisions made under the IPS. For example, if the policy adopts a total return investment strategy with annual income percentage elections, approve those elections at a Board meeting and document them in the records. See our Sample Board Resolution Making an Income Election.
  6. Review and Update the IPS periodically. Adjustments to asset allocation, investments, and spending policies may need to be considered regularly and updated to reflect the organization’s goals and changing market conditions.

We have developed a Toolkit for Sourcing and Selecting an Investment Advisor. The toolkit includes a checklist for selecting and working with an investment advisor; a sample Request for Proposal (RFP); and considerations for selecting an investment advisor with impact investing experience.