How to Align Assets with Mission: Small Steps That Nonprofits Can Take

Have you reviewed your balance sheet lately?

Many in the nonprofit sector look at their income statements (also known as the “profit and loss” report), but unless you’re a chief financial officer or perform a similar role, you may spend far less time looking at your organization’s overall financial position.

Yet, hidden in those balance sheets, more often than you may think, are cash and other investable assets. These assets help nonprofits deliver on their missions by generating income. Developing a sound approach to managing these assets is part of the fiduciary responsibility of nonprofit boards. Often, investments are viewed separately from the programmatic work a nonprofit does. But should they be?

Often, investments are viewed separately from the programmatic work a nonprofit does. But should they be?

Traditionalists have argued that if an investment portfolio is aligned with mission, poor performance follows, sacrificing income that could be spent on operations and programs. However, along with academic and industry research to the contrary, this line of thinking ignores the fact that you may be undermining your mission through your investments.

A salient example is of organizations that are focused on community development but invest in mass incarceration. Thanks to prison privatization, corporations, many of whom, like CoreCivic, are publicly listed companies, have a perverse incentive to boost their stock prices and keep prisons full by lobbying for policies like harsher policing, longer sentencing, and incarceration for non-violent crimes. If organizations that, say, are campaigning for cash bail invest in corporations (perhaps through a major institutional investment intermediary like BlackRock) that profit from incarceration, how does that benefit their work, even if the financial returns are good?

To date, discussion on mission-aligned investing has largely focused on wealthy foundations and endowed institutions, but over half of all charitable organizations have total assets of less than $1 million. Together, these smaller nonprofits have an estimated $22.1 billion in cash and cash equivalents (that is, assets that can be easily sold and converted into cash) and other investments. As asset owners, all nonprofits—along with institutional investors and foundations—need to address social and environmental issues through balance sheet activism—doing so is critical to meeting both business and mission objectives.

 

Getting Started

Every nonprofit board should understand the importance of liquid assets like cash in carrying out their mission—no amount of investment will serve an organization if investments are tied up in a way that prevents the organization from having cash at the ready when needed. Liquidity policies help organizations understand the resources needed to carry out ongoing operating activities, but even liquid assets can be managed with an eye towards mission. Is your checking account at a local credit union or a bank that may invest in corporations you are campaigning against?

For example, the Oregon State University’s Liquidity Management Policy recognizes that “optimal liquidity management will align financial decisions with the university’s mission.” It asks questions like “does the action align with the university’s mission?” and “are resources sufficient and flexible enough to support the mission?” Establishing a liquidity policy lets nonprofits know when there is excess cash that can be used to support shifting a portion of their assets into long-term investments that are more strongly aligned with their missions, while generating additional income that can be reinvested into operating activities.

 

Setting A Policy

The same rigor nonprofits use to fulfill their missions can be applied to investments through an investment policy statement. Creating an IPS may sound like a heavy lift, but an IPS is simply a board-approved document that outlines policies to determine how assets are invested and who is accountable for investment-related activities, while ensuring compliance with fiduciary duty.

Key IPS components may include scope and purpose, governance, investment asset classes, return and risk objectives, investment benchmarking, and risk management. Creating an IPS may be as simple as codifying existing investment policies and procedures or engaging investment professionals and legal counsel to assist with development. Many templates and guidelines are publicly available.

Perhaps the easiest first step is to know what you own and why you own it.

To integrate mission into an investment policy, some organizations create a separate Impact Investment Policy that broadly defines impact investment values and strategies. Other organizations integrate impact goals directly into their IPS. This impact investing handbook, developed by Rockefeller Philanthropy Advisors, is one helpful guide.

 

From Policy to Action

There are countless opportunities for nonprofits to bank with a mission-oriented financial institution.

Developing a policy statement that integrates impact with financial goals is the first step to turning intentions into action. Once a nonprofit understands their investment policy statement, the fun part begins—finding opportunities to invest. Investment solutions exist regardless of an organization’s size or investment policy constraints. Perhaps the easiest first step is to know what you own and why you own it. Understanding existing assets can help to formulate a plan for how to optimize both return and impact, and potentially find easy opportunities to do both.

Below are examples of nonprofit institutions of all sizes leveraging the four most common asset classes—cash, fixed income, public equities, and private investments—to be mission aligned.

• Cash: There are countless opportunities for nonprofits to bank with a mission-oriented financial institution. Comparison sites like Mighty Deposits and BankforGood make it easy to find banks or credit unions that match institutional values. For example, when GirlVentures, an outdoor girl and gender non-conforming education adventure program, moved to Oakland, CA, they looked for a local bank with social responsibility as part of its mission. GirlVentures chose Beneficial State Bank, a state-chartered, federally insured, for-profit bank whose economic rights are majority-owned by the nonprofit, Beneficial State Foundation, which is permanently governed in the public interest. That ownership allows the bank to maintain an innovative banking model that generates benefits for people and the planet while being financially safe and sound.There are many reasons an organization may not be able to move their banking—including relationships with their banker; an existing suite of products and services that work for the organization; or the costs associated with vetting, opening, and transferring accounts. As an alternative to a new banking relationship, some nonprofits with more than $250,000 in cash deposits opt to use cash management platforms. These platforms maximize federal deposit insurance protection across the banking system through a single point of entry by placing cash deposits in multiple CDFIs (community development financial institutions) and MDIs (minority depositary institutions). For example, the Russell Family Foundation uses StoneCastle’s FICA Impact fund for these purposes.
• Fixed Income: Fixed income is an often-overlooked instrument in mission-aligned investing. The most common form of fixed income investments are bonds. These are debt instruments (effectively, large low-interest loans) used by governments, corporations, financial institutions, nonprofits, and other entities to fund programs or operations. In 2021, Enterprise Community Loan Fund revised our Investment Policy Statement, allowing us to invest in bonds of CDFIs, historically Black colleges and universities, and other institutions that meet our investment parameters. The addition of these asset classes to ECLF’s investment policy optimizes the impact of our balance sheet assets to be mission-aligned while still earning market-rate returns.
• Public Equities: Public equities include investments in public companies through shares or stocks. While numerous funds focus on ESG (environmental, social, and governance) factors or thematic equity funds, some mission-aligned investors will use proxy voting to push corporate policy changes. Nonprofits can support these efforts, even if they hold only one share. For example, the Sisters of the Holy Names of Jesus and Mary won a proxy vote in 2018 to require Smith & Wesson to make safer guns and report on gun-related violence and financial and reputational risks.
• Private Investments: Private investments can range across asset classes from private credit, real estate, and natural resources to private equity, infrastructure, or hedge funds. This generally is the purview of larger nonprofits, so it is not for everyone, but used properly it can be a powerful tool. For example, taking advantage of its growing size and liquidity, Local Initiatives Support Corporation carved out a portion of its investable assets towards impact investments, like a $1 million placement in the SustainVC Impact Fund II, a $25 million fund supporting early-stage companies focused on social and environmental impact, and a $500,000 investment in the Fearless Fund, which invests in businesses owned by women of color. Enterprise Community Partners, the parent company of Enterprise Community Loan Fund, made a direct investment in Stake’s Series A, a startup which provides banking services and cash-back rewards for on-time rent payments, a housing strategy that helps families who rent to build wealth.

 

Selecting an Outside Adviser

Some nonprofits work with investment advisers or an outsourced chief investment officer to bring additional capacity, know-how, and credibility to their mission-aligned investment journey. An investment adviser typically provides analysis or advice, whereas an OCIO refers to the full or partial outsourcing of the investment function to a third party. An OCIO may have discretionary authority to execute investments on a nonprofit’s behalf, using the IPS set by the board as a guide.

For example, when Good Shepherd Food Bank, the largest hunger relief organization in Maine, had investable assets growing in excess of their required liquidity, they hired an investment adviser to align their assets with their mission. To choose an adviser, they convened a committee of staff and board members to issue a request for proposals and interview advisers who would uphold their organizational priorities to fight food insecurity. “In doing so, [they] were able to put [their] donors’ dollars to work through investments that directly supported [their] mission, rather than working against it.”

Alternatively, the Nathan Cumming’s Foundation launched a search for an outsourced chief investment officer to manage its endowment and co-create a mission-aligned investment strategy to enhance its impact, integrate program and investing functions, and meet financial goals. The search was held in two phases and included a public request for proposals.

In either case, the nonprofit’s board should clearly articulate their plan and process for monitoring investments and the work done by third parties on their behalf, which may include producing investment performance reports, benchmarking efforts, or other ongoing analysis. Ongoing monitoring is especially critical when integrating mission into a policy to ensure board members are continuously educated about the financial, social, and environmental impacts of their investment policies and the trade-offs, or lack thereof, entailed in such alignment.

 

Concluding Thoughts

As you begin engaging your board and stakeholders on ways to align money with mission, here are some initial actions to consider:

1. Start with your why: Articulate why mission-aligned investing matters for your organization. If your mission is based on climate, your “why” could be to mitigate climate risk in your portfolio. If your mission is based in arts and culture, your “why” could be to support new makers or artists. Your why comes from and is in support of your mission. Building out your business case and implementation plan is a key step to getting organizational decisionmakers on board and excited about your investment strategy.
2. Educate your board and investment committee: Your board may manage investments at the board level, or, if you’re at a larger nonprofit, the board may have a separate investment committee structured as a board sub-committee. Investment committee members may come from traditional finance backgrounds and may not understand how or why to integrate impact into portfolio management. Many nonprofits may outsource decision making to an investment adviser or OCIO. Provided financial performance thresholds are met, there is little incentive for advisers or OCIOs to find and propose mission-aligned investments, unless the board’s IPS states that this is a priority or the board’s investment committee actively reviews performance reports.
3. Leverage your peers: Organizations like Confluence Philanthropy, the UN Principles for Responsible Investment, Mission Investors Exchange, and the Intentional Endowments Network, among many others, serve as forums to learn and exchange ideas about beginning a mission-aligned investing journey. Although many are geared towards larger foundation or endowed institutions, their examples and templates can be applied to organizations of all sizes.

In short, maximizing balance sheets for impact creates opportunities for nonprofits to engage with a spectrum of stakeholders—from donors to board members to beneficiaries—and offers new ways to integrate mission work across the organization. As a baseline, nonprofits can ensure that their investments are not counteracting their programmatic work. After that, the potential for further alignment—so that your money works for, rather than against, your mission, even as you earn a financial return—can be an important force multiplier for your work.

 

 

This information is for educational purposes only and is not intended to be investment advice. Please consult a financial professional for more information.