Impact Investing: Nonprofits and the Parable of the Talents
May 11, 2022
The Parable of the Talents is often referenced when the topic of investing arises. The story aims to teach us that talents (our money, resources, tools, or gifts) are to be placed out in the world and put into action where they can benefit others, grow, and then come back multiplied. The principle applies to faith-based nonprofits, as well as individuals and for-profit businesses. When a faith-based organization finds itself with extra cash, the organization should consider whether investing these extra funds prudently would be in the organization’s best interest.
For example, consider a faith-based school that receives donated property, which the school is able to sell for a profit of $500,000. If the school’s annual operating expenses are $200,000, the remaining $300,000 will earn only standard interest rates unless some portion is prudently invested. The board may decide to invest some of the additional funds to increase the resources available to the organization and its programming. However, the organization should be conscientious that it does not invest in opportunities that contradict its mission and religious beliefs.
Impact Investing: The Basics
Fortunately, a new approach to investing has been gaining momentum. Impact investing, the cool kid on the investment strategy block, offers faith-based nonprofits an opportunity to grow their “talents” while remaining true to the organization’s mission and religious beliefs. An “impact investing” strategy seeks to provide financial returns as well as promote social and environmental change that aligns with investors’ (in this case, the faith-based nonprofit’s) values.
How popular is this newer strategy? “Sustainable portfolios” (a type of impact investment fund that focuses on environmental, social and governance investments, commonly known as “ESG”) in the United States received about a quarter of all new assets in mutual funds and exchange-traded funds in 2020, according to Morningstar. Since 2018, there has been a 42 percent increase in what are considered “sustainable investing assets” currently amounting to 1 in 3 dollars under professional management, according to the US SIF Foundation.
Faith-Based Nonprofits and Impact Investing
For a faith-based organization, some appropriate impact investment opportunities include health care, education, energy and agriculture. Investments in these causes may have a positive effect, such as funding the development of educational technology by a company that creates learning software for children, or bonds that underwrite and support construction of housing for those in need.
Faith based nonprofits may be encouraged by their own leadership or donors to pursue impact investing. This makes sense for a few reasons:
- Long before it was socially favorable, faith-based nonprofits have dedicated countless hours to improving conditions in their communities especially in the areas of education and health care; therefore, investing in aligned endeavors is consistent with the work such nonprofits have already been doing for decades;
- Investing in socially-admired ESG funds may be good for a nonprofit’s image because the engagement demonstrates that the nonprofit is consistent in the execution of its values (whereas consider the counter effect if a lung cancer support nonprofit invested in a cigarette manufacturer); and
- There is often crossover of knowledgeable and engaged officers who serve on nonprofit and company boards that have entered the ESG arena, which ties together an existing network that may benefit both nonprofit and corporation.
However, there are also a number of issues that faith-based nonprofits should remain mindful of when considering impact investing:
- Whether the nonprofit’s engagement with impact investing meets the statutory requirements permitting the organization’s tax-exempt status;
- Whether there are sound reasons for pursuing certain investments including whether the nonprofit’s charitable purpose is furthered by investment;i
- Whether there are procedures in place to maintain information regarding possible connections that board members have with impact investment institutions. This serves as a check to minimize claims of impermissible private inurement when business leaders, who often serve as board members, may stand to benefit by investing decisions;
- Whether there are possible impermissible private benefit issues that stem from the nonprofit engaging in activities that serve a private rather than public interest. For example, since an exempt organization must be organized and operated exclusively for exempt purposes, although an investment or a portfolio may claim to further a social benefit, the investment’s advertised social purpose may not in actuality include an exempt purpose as required. Additionally, a good intention of a socially conscious investment may nevertheless subject the nonprofit to an impermissible private benefit as there may not be enough activity that serves a public benefit.
- Whether a nonprofit’s impact investing decisions make sense in light of the organization’s purpose and operations. Recent examples include universities and student groups voting to divest from fossil fuels or advocating the participation in Boycott, Divest and Sanctions (BDS) against Israel.
- Whether there are procedures to address possible conflicts between investment’s pursuit of doing good versus generating a profit; there may be situations when the question will arise concerning which will take priority, the social impact or the financial impact, when they cannot evenly be pursued. To this end, in the case of asset and resource allocation, nonprofits need to have an assessment and decision-making plan.
- Whether the nonprofit has a process to review the impact of financial decisions on protecting human life, promoting human dignity, economic impacts, and the environment.
- Whether there are procedures to find relationships of board members of the nonprofit and for profit entities that may raise private inurement issues;
- Whether the nonprofit has the potential to be both investor and recipient of a benefit corporation’s investment;
- Whether there are procedures to implement oversight as well as remedial controls in engagements concerning impact investing and partnerships.
- Whether the nonprofit is aware of who makes the determination of a corporation’s actions and whether they are in furtherance of a positive social change;
- Whether the investment is consistent with a nonprofit’s core values and is not going to appear as merely as a marketing or human resources plan to boost a certain image.
- Whether there is a cohesive belief of values of the nonprofit and those exhibited by the target portfolio’s commitment to “corporate social responsibility” (CSR). Although that term is regularly used in conversation these days, it is worthy to note that the implementation of CSR can mean different things to different people. (See for example, an opinion piece by Mark Brnovich, “ESG May Be an Antitrust Violation,” Wall Street Journal, March 7, 2022.)
- Lastly, whether some of a nonprofit’s existing investments may already provide public benefits by traditional corporations as part of their profit-seeking business model.
If your nonprofit is ready to learn more about faith based funds or managers, consider designating a board member to research potential investment opportunities and to provide proposals. An accessible starting point is an internet search of the terms “Christian, Catholic, faith based investing.” The following sites linked in the “Further Reading” section promote Biblically aligned funds and resources may provide helpful information:
Faith based nonprofits have long aimed to carry out the lesson of the Parable of the Talents. Now, that the financial sector offers impact investment funds, nonprofits have more opportunities to fund important social objectives in ways enlightened by the Biblical lesson of the talents. However, faith-based nonprofits would be wise to approach impact investing with open eyes to the numerous issues that may compromise the organization’s tax-exempt status.
Examples of Impact Investing Funds:
(Please note that Napa Legal does not endorse any of the organizations and provides the links for informational purposes only. Nonprofits are encouraged to seek out professional advice for guidance regarding management fees, potential annual returns, etc. before any investment is made.)
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