How charities can think about sustainable investing?

While environmental, social, and governance (ESG) factors are commonplace in the corporate sector, charities have just started discussing them. There is a growing emphasis on ESG investing in the third sector as a result of increased public and media scrutiny, a better understanding of reputational risk, and demand from stakeholders for charities to uphold their ideals.

The social component of ESG is at the heart of all they do. Doing the right thing and changing the world are considered to be the primary purposes of charities. Without even recognizing it as an investment strategy, many charities pursue ethical investing, for example, deciding not to invest in corporations whose activities contradict the charity’s ideals.

What are the recent changes in Charities?

Although donations are the lifeblood of charity, may money be put to better use by promoting change?

The pandemic undoubtedly presented challenges to the way charities operate. It took innovative strategies to keep the crucial donations coming in despite canceled events and less face-to-face fundraising. Despite good donation levels, a Groups Aid Foundation survey indicated that sponsorship levels decreased, particularly affecting some charities. At the time, 60% more people were reliant on charitable contributions.

The charitable sector is more crucial than ever, given the current economic situation and overburdened public services. It can significantly impact every aspect of society, including the environment and medical research.

Charities are now demonstrating their commitment to sustainability. They also embrace the challenge and implications for their funding and investment options.

What is sustainable investing?

The impact of growing inflation, which depletes charities’ cash reserves and lowers the value of grants and donations in real terms, must, of course, be lessened, and a sound investment strategy is essential.

Negative screening or avoiding investments in specific companies and industries, including those that deal in arms, adult entertainment, cigarettes, and alcohol, may be a part of sustainable investing. Fossil fuels are now included in this screen; they were scarcely on the radar five years ago, but they are now a prominent component of many investment portfolios.

To make sure that their investments are having a beneficial impact on society and reflect their larger beliefs and objectives, organizations can also use “positive screening.”

They must critically consider how any funds, bonds, or businesses they invest in promote sustainability and the broader ESG agenda. To keep such businesses on their toes and encourage positive change, it is equally crucial that their investment managers vote and interact with those businesses.

Some charities might be worried that ethical investing will do worse than investing traditionally and yield lower returns.

Given that reporting requirements for governance and risk strategy increasingly overlap with capital allocation and finance, charities should take the initiative to incorporate sustainability and other ESG issues.

Organizations can also invest in bonds that benefit a more comprehensive range of ESG-related issues and sustainable causes. According to Reuters, a record amount of sustainability bonds were issued globally during the first nine months of 2021. The entire green, social, and sustainability-related issuance came to $777.6 billion, which represents a 57% increase from the previous year. The accessibility of bonds to investors and the variety of options show how sustainable investments have advanced across asset classes.

What are charity reserves?

For a charity to be robust to upcoming obstacles like a decline in income, the demands of a new project, or even a global disaster, the Charity Commission suggests having cash reserves, that is, unrestricted funds that may be used.

All charities must have a policy outlining their reserve management strategy, and trustees must ensure the charity’s funds are prudently invested as part of their duties. This entails exercising caution and responsibility while pursuing the highest returns feasible in accordance with a predetermined strategy for investing risk.

How risky would it be to use charity money? Only an advisor can help you with this query. It also depends on the factors, including how long the funds might be invested and if it is a short-term need for income or a requirement for long-term capital growth.

What are sustainable loans?

There are two kinds of sustainable loan arrangements for charities. The first links the funding to the overall sustainability targets against the specific KPIs, while the other supports the delivery of a particular green project.

Since 2018, the green and sustainability-linked loan market has grown ten times. Extra credit is given to the recipients of these loans because their activities are ‘validated’ as green by established bodies, such as the Climate Bonds Initiative.

Wrap Up

Although the strategies of the charities are increasingly incorporating sustainability, this incorporation must be done in a measured, verifiable manner. Failure to fulfill these pledges increases risks to both access to financing and a charity’s social license to operate, as stakeholders demand more concrete results regarding ESG factors.

Creating a successful sustainability strategy can help charities make a difference, safeguard their reputation, and generate long-term investment returns. The relationship between sustainability and charitable giving is expected to be strengthened.