Having been committed, for more than 25 years, to assisting non-profit organisations in their quest to become more financially healthy and sustainable, Ziyo has previously stressed the importance of a reserves policy. Such a policy frames the strategic financial objective of building reserves which can both protect NPO’s from temporary cash flow crises and provide sources of income that are not grants and donations. In doing so, the policy also clarifies for stakeholders the reasons why unrestricted funds are being set aside in reserves and can set targets for and limits to the size of those reserves.
Building reserves is not easy and, even if it is successfully achieved, it creates further difficulty in deciding how those reserves should then be invested, unless the NPO also adopts an investment of reserves policy. In setting this policy, the organisation’s governing body needs to weigh up factors that relate, for example, to risk, the type or spread of investments and the need for capital growth or an income stream.
One factor that has not had a lot of attention over the years has been the importance of “responsible” or “sustainable” investing but this has now changed and more investment decisions are being based on the ways in which invested funds are used. We are aware of three main approaches to sustainable investing and, while the terminology is often used interchangeably, there are important differences between them as each approach involves different investment strategies. The approaches are:
- Socially responsible investing – this involves actively choosing or removing investments based on specific ethical guidelines, for example choosing not to invest in companies that manufacture weapons, tobacco products or alcoholic drinks or that extract and trade in fossil fuels.
- Impact investing – which makes capital available to a business in order that it can complete a project or develop a programme that will benefit society, such as a construction project that will provide low-cost housing.
- Environmental, social and governance investing – this involves looking at a company’s environmental, social and governance practices as well as the more traditional financial measures. This approach is driven by the view that companies are more likely to succeed and deliver sustainable, strong returns if they create value for all their stakeholders (employees, customers, suppliers) and for wider society, which includes consideration of environmental impact.
If, as it should be, financial sustainability is a key strategic objective of your organisation, we urge you to ensure that not only do you put a reserves policy in place but that you support this with an investment of reserves policy that ensures your organisation is a responsible investor.
The organisation should seek independent investment advice in this regard, whether through an outside advisor or through an advisor on the finance committee or board.
If you would like support or advice in considering how to build reserves or to develop a reserves policy, please do not hesitate to be in touch with us.
With best wishes from the Ziyo team