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Charities must operate on a not-for-profit basis. But this doesn’t mean they must merely break even or run at a loss.

In fact, generating profit strengthens a charity’s balance sheet. It can provide a charity with a longer-term ability to manage unexpected costs, invest for policy changes, navigate short-term funding gaps and deliver greater impact.

As part of their approach to financial management, many charities choose to hold or invest surplus funds – such as in term deposits or other investments – rather than keeping all funds in a standard transaction-based bank account in the charity’s name.

When investing money, charities will aim to either generate income, or to preserve or increase the value of existing reserves that are not immediately needed to further their charitable purposes. This can include protecting or growing funds for a particular activity – for example, towards building works or buying equipment.

With knowledge, risk mitigation strategies and a realistic plan, prudent investments can diversify a charity’s income stream while maintaining good practice in financial management.

This guidance defines common investment terms, and outlines key considerations for charities when investing funds to generate income or grow assets. These considerations relate to a charity’s:

  • decision-making processes
  • risk management
  • policies and procedures about investing.

This guidance is intended to be general in nature and does not account for individual charities’ financial situation, objectives or needs. Charities should consider obtaining professional financial advice suitable for their individual needs.

Asset class – a grouping of investments that share similar characteristics and are subject to similar regulations and market behaviours. Examples of different asset classes include cash, bonds, property, and equities or shares.

Capital – the financial resources, such as money, assets or reserves, that comprise a charity’s net wealth, and which may be invested.

Counterparty – any other party involved in a financial transaction such as a buyer, seller, lender, borrower, or party to a financial agreement. It may be an individual, business or financial institution.

Credit rating – represents an assessment of a charity’s ability to repay debt or meet financial or other obligations.

Diversification – spreading your investments over a range of asset classes – or over a range of investments within each asset class – to minimise the possible risks associated with each type of investment.

Environmental, social and governance (ESG) investing – a strategy that incorporates non-financial factors based on environmental responsibility, social practices, and governance quality alongside financial metrics to evaluate investment options. Considering these elements can complement a charity’s consideration of financial risk and opportunity. Using ESG principles helps a charity invest in a way that is both financially prudent and aligned with its purpose and values.

Inflation – the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of money is falling. For investors, inflation erodes the real returns on investments if the investment's return doesn't outpace the inflation rate.

Interest rates – the cost of borrowing money or the return on savings. Interest rates are important in determining the profitability and risk of various investments.

Impact investment – investing in projects or ventures that aim to create measurable social or environmental outcomes to further the charity’s purpose alongside generating a financial return.

Investment policy – a set of guidelines and parameters that govern how a charity will make investment decisions. It serves as a roadmap, providing a structured approach to help investors achieve their financial goals while managing risk effectively.

Liquidity – how readily your investment can be turned into cash without significantly compromising the value of the investment.

Negative screening – avoiding investments in companies or industries that conflict with your charity’s purpose or values. For example, a Health Promotion Charity might choose to avoid investing in businesses involved in tobacco or gambling.

Positive screening – actively choosing investments in companies or industries that align with a charity’s purpose or values. For example, a charity may deliberately choose to invest in companies that have strong environmental practices or achieve social outcomes.

Return – the percentage change in value of the investment over a given period, including both capital appreciation and dividends or income.

Risk – an estimate of the likelihood that the actual return-on-investment differs from the expected return-on-investment. Several factors can affect risk, including asset type, the length of time funds are in the investment, the specific investment vehicle used, and the general and specific market conditions.

Social investment – investing money or resources to help social sector organisations grow and achieve social outcomes. A social investment is different to a grant because the investment is accompanied by the expectation it will be repaid in its entirety, and possibly with an additional financial return.

Stocks – also known as shares or equities, these represent partial ownership in a company.

Volatility – measure of instability in return-on-investment.

Financial investment – a general overview

Preparing to invest

When making investment decisions, charities must ensure they comply with the ACNC Governance Standards, and, if applicable, the External Conduct Standards.

The ACNC does not specifically prescribe what a charity must do to meet these standards, and each charity must decide the appropriate measures to take based on its own circumstances.

Responsible People should carefully consider if investing funds is the right decision for their charity, as well as their approach to investing.

These actions are part of Responsible People’s stewardship of their charity’s resources, and are an important part of their roles in managing their charity’s financial affairs responsibly and diligently, and in ensuring their charity stays on mission – requirements detailed in ACNC Governance Standard 5.

Governance Standard 5 requires charities to take reasonable steps to ensure their Responsible People comply with duties to:

  • manage their charity’s financial affairs responsibly
  • act with reasonable care and diligence, and
  • act in good faith in the charity’s best interests, and for its purposes.

Responsible People should also have a proper understanding of the opportunities and risks associated with investing and should carefully consider them when making decisions about charity assets.

A failure to do so could lead to unexpected losses that impact their charity’s ability to fulfil its purpose, or that damage supporters’ trust and confidence.

To ensure they are sufficiently informed before they make decisions, it is good practice for Responsible People to seek independent expert advice where they do not have the necessary skills and experience.

Overarching considerations before making specific investment decisions include:

  • checking if the charity’s governing document or any funding contract allows or limits the power to invest charity money
  • checking there are no other issues preventing charity money being invested, such as restricted reserves or donor requirements
  • complying with obligations to other regulators, and with laws that may apply. These may include laws relating to taxation or to the charity’s legal structure, to regulations applying to anti-money laundering, counter-terrorism financing and modern slavery, or to other regulatory or legislative restrictions.

It is important to be able to demonstrate that the charity has crafted its investment strategy with reasonable care and diligence, that investment decisions will be made in the best interests of the charity and towards it carrying out its charitable purposes, and that the charity’s decision-making is supported by good record-keeping.

In any investment policy or decision, Responsible People have a duty to consider the risks posed by private benefit and related party transactions.

A charity’s purposes must be for the public benefit, but if investing charity money could result in private benefits to others, Responsible People must use their judgement to ensure that any private benefits arising from investing are incidental (an unsought consequence or by-product of an investment decision that is in the charity’s best interests).

Additionally, if a potential investment gives rise to a conflict of interest, the conflict must be carefully managed to ensure that the investment decision is made in the charity’s best interests. For example, an investment that is a related party transaction will generally be a conflict of interest, which must be managed. It may also mean the charity should not proceed with that investment.

Investment policy

An investment policy defines how a charity makes its investment decisions. Some charities, such as private and public ancillary funds, are required to have an investment strategy.

An investment policy should state the charity’s investment objectives, as well as setting out the strategies and processes the charity uses to make its investment decisions.

The policy should clearly outline the criteria the charity uses to select investments – for example, with consideration given to income needs, expected returns after fees are paid, diversification and the balance between return and risk.

It should also be suitable to the charity’s size and the size or number of investments it intends to make.

As well as the considerations outlined above, other elements to think about including in a comprehensive investment policy are:

  • the scope of the charity’s investments, including who has responsibility for them
  • the charity’s risk appetite around investments, taking into account:
    • capital risk and market volatility comfort levels
    • maximum and minimum return expectations
    • diversification that aims to minimise risk
    • restrictions on any types of investments (see below)
    • counterparty matters when contracts, advisers or investment managers are engaged, including termination of engagement. The charity can delegate some investment decisions to others such as a qualified fund manager, but overall responsibility remains with its Responsible People
    • credit ratings of financial institutions trusted with the charity’s money
    • market issues, such as dealing with inflation, interest rates and currency changes
    • regulatory governance and managing changes that may occur (including changes in any other countries where investments are made)
  • the amount of money available for investing, and the investment timeframe
  • the identification of the asset classes and rating of investments the charity may make, and any ranges or restrictions the charity may impose on investments
  • liquidity needs, and about how – and how often – the charity may need to access the invested funds
  • roles, responsibilities and decision-making processes (such as the frequency of meetings of any investment committees, approvals, management of and reporting on investments)
  • key performance indicator expectations and the intervals at which investments will be reviewed
  • record-keeping for all investment decisions to inform any future audit or review processes, and to support ongoing decision-making by Responsible People (and future Responsible People), and
  • guidance on the requirements for maintaining the policy, including how often it will be reviewed and who will be responsible for reviewing it.

Types of investments

Different types of investments serve different purposes in a charity’s portfolio.

While asset classes are often grouped using descriptors such as ‘defensive’, ‘growth’, or ‘speculative’, it can be more helpful to think of investments in terms of what each asset is designed to do – for example, to:

  • preserve capital
  • generate long-term growth
  • provide income, or
  • diversify risk.

Once your charity is clear on the investment outcome it wants, it can then consider the type of investment. It is important to note that asset classes are just broad terms and the particular investment may not, at a given point in time, fit as a good ‘defensive’ investment.

Charities should carefully consider whether higher-risk investments align with their investment policy, risk tolerance, liquidity needs, and reputational considerations.

Independent professional advice is recommended, especially before entering speculative or complex investment arrangements.

The cost of investing

Returns on investment are impacted by fees paid.

These can be fees for expert advice, or transactional fees like those for establishment, transactions, administration, switching, or adviser commissions.

Charities should identify and adhere to a required investment return – or at least a range in which such a return should fall – net of fees.

Responsible investment - considering ESG factors

Charities may want to take environmental, social or governance (ESG) issues into account when investing.

These decisions are often not straightforward – responsible investment options can have higher fees, narrower choices and different return profiles, and decisions can involve complex judgment calls, trade-offs and specialist advice.

Instead of charities relying on ‘positive’ or ‘negative’ screens – that is, seeking out or avoiding certain investments based on their alignment with their purpose or mission – they should focus more closely on how any ESG-related decision specifically supports their purpose and aligns with their legal duties.

In some cases, charities may decide that an ESG investment overlay is a strong preference and worth the extra effort it may involve. For others, a different approach may be more suitable.

The goal in this is to balance the charity’s mission with its obligation to responsibly manage and grow its funds.

Some reasonable steps charities can take to demonstrate compliance with Governance Standard 5 as they look at adopting a responsible investment policy include:

  • checking any investing limits in their governing documents or legislation
  • documenting why a particular ESG factor matters to the charity’s purpose
  • assessing how exclusions against or preferences towards certain investments might affect financial returns and how this might impact the charity’s ability to pursue its purposes
  • seeking specialist advice where needed, and ensuring they know how their investment advisers manage ESG imperatives
  • monitoring any agents or specialist firms appointed to implement the responsible investment policy, and
  • regularly reviewing their responsible investment policy.

Investing for impact

While this guidance focuses mainly on the investment of charity money for financial returns, charities may also consider impact investment.

These investment approaches aim to align investments with charitable purpose to generate measurable social or environmental returns alongside a financial return. Impact investing is a complex and evolving field that boards can incorporate into their governance conversations, learning from charities and professional advisers that are already experienced in this area.

These investments can help charities deliver on their purpose and mission, and may be worth exploring as part of a charity’s broader strategic plan to deliver impact.