We recently sat down with Steven Moe, Partner at Parry Field Lawyers, to provide his insight into changing funding attitudes and the emergence of impact investing for NFPs. He will delve further into this topic at the upcoming Not-For-Profit Law Critical Updates webinar on Thursday 12 March .
How are funder attitudes changing?
We live in a time when paradigms are colliding. Old conceptions from an extractive economy which have been accepted for decades are being challenged by new ideas that are planted in the soil that dreams of a regenerative economy. One outworking of this is the growth of “Impact Investing”. Increasingly, organisations are being pressured by both shareholders and stakeholders to achieve a social impact alongside financial returns. Larry Fink, CEO of Blackrock (the largest investor in the world at around US$6.8 Trillion) has stated, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” According to the Morgan Stanley Institute for Sustainable Investing, 85% of investors surveyed were interested in engaging with Impact Investing. It is clear that funders are now expecting more from the organisations they choose to invest in.
What do NFPs need to consider when exploring impact investing within their future investment plans?
It is important for NFPs to consider what impact they want to achieve – is the way they have always done things the only way? Are there other options? One that could be considered is through investing for impact. Critical to this is how to measure impact and set expectations and create accountability. The NFP will also need to address what to do if the impact is not achieved.
As with any form of investing, impact investing carries risks which NFPs should consider. For example, as impact investing is an emerging concept, there is less capital in the market. This means that it may be harder to sell investments if capital is needed. NFPs need to think about whether they will be in a position to wait the full duration of the investment. What are the motives – purpose and profit?
What are the key attributes of impact investing?
Some of the key attributes of impact investing include a desire to achieve a positive social/environmental (or other) impact, a plan to measure this impact and an expectation of generating a financial return on the capital invested. So this is more than just grant making as the money actually comes back. The Global Impact Investing Network summarises this as: “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The key is that there will be some positive impact through the investment, while still generating return for the investor.
What types of projects suit this model of investment?
Well, the legal form of the organisation being supported will determine whether this model of investment is possible. For example, a registered charity cannot issue shares that return dividends. Conversely, entities such as social businesses, social enterprises and trading charities may have the capacity for impact investing. Then there are different types of projects that NFPs may invest in. An organisation may seek seed funding, allowing them to research and develop new ideas. Alternatively, money may be invested to grow an existing project or enable a business to perform a contract (e.g. social bonds). Finally, impact investment can allow an organisation to purchase assets which will provide revenue over time.
What legal questions does an organisation need to take into consideration before embarking on this model?
The governing body of a NFP must ensure their investing activity complies with legislation and their governing documents. For example, Sections 13A and 13B of the Trustee Act enable trustees to invest prudently in any property. This means that trustees must exercise care, diligence and skill when investing trust assets. Section 13E sets out a list of factors that trustees may consider when choosing to invest. It is important that trustees seek professional advice when choosing to invest and take steps to reduce the risk of breaching their duties.
The trustees must also ensure they are complying with the trust deed. The trust deed may direct trustees how to use the trust’s assets and have instructions on investing. The charitable purposes of a registered charitable trust will also guide the trustees as to the type of projects they should invest in. Where possible, it may be beneficial to amend the trust deed to expressly allow the trustees to carry out impact investing. If the trustees are unsure of their obligations, it is recommended that they obtain advice.