8 December 2021

The not-for-profit (NFP) sector has become increasingly aware of the importance of holding the right level of reserves and having an appropriately considered and supportable reserves policy. But once an NFP has identified its long-term investment reserve, its next step should be consideration of an investment policy to guide how that reserve will be invested.

For NFP organisations, in particular, the Environmental, Social and Governance (ESG) criteria of the companies you invest the long-term reserves into are important considerations. ESG investments can be suitable for NFP investors who can align their investment strategy to their cause.

ESG considerations are material to investment risk management and performance outcomes, therefore ESG factors should be considered and integrated into the investment analysis and decision-making process. To support this, an NFP requires a well-documented investment policy that incorporates an ESG screening process and exposure limit guidelines.

Assessing ESG investments

ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Consideration is given to:

• Environmental criteria - how a company performs as a steward of nature.

• Social criteria - how a company manages relationships with employees, suppliers, customers and the communities it operates in.

• Governance – how a company deals with their leadership, executive pay, audits, internal controls and shareholder rights.

ESG screens can be positive or exclusionary. A positive ESG screen will seek to consider companies with good ESG scores.

Whilst investment managers may use an in-house proprietary ESG scoring system or use well regarded ESG scoring providers, generally speaking Findex seeks companies in alignment with the United Nations Principles for Responsible Investment.

Investment managers may apply a different set of negative ESG screens in terms of company categories as well as different revenue thresholds upon which a company gets excluded, for example, alcohol, tobacco, gambling.

Embedding ESG, including active ownership and engagement, can be a more effective way to achieve sustainable risk adjusted performance than excluding individual companies or industries based on their products or behaviours, however, we do seek to avoid some investments.

Findex believes that sustainable investment behaviours should be maintained in the execution of strategies, sectors and portfolios.

If you’d like assistance developing an investment policy for your NFP, please contact us or find an adviser in your area.

Disclaimer

The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your circumstances. Before you make any decisions in relation to a financial product, you should obtain and read the relevant Product Disclosure Statement, Information statement or Target Market Determination (TMD). You should seek financial advice before acting on any material.