Don't Be Caught Off Guard: Adopt Responsible Investment Guidelines Into Your Planned Giving Program

Heightened awareness of environmental, social and governance (ESG) causes has inspired nonprofits and their donors, especially younger donors, to seek out ways to affect change. Learn how nonprofits can adopt responsible investing in planned giving programs.

Nonprofits, like corporations and government entities, have seen a rise in the demand from their donors and other constituents for accountability and transparency about their impact on the community, the environment and the people they serve. Heightened awareness of environmental, social and governance (ESG) causes has inspired nonprofits and their donors, especially younger donors, to seek out ways to affect change.

Values and impact are now part of the giving calculus and investment landscape for donors and their advisors. And nonprofits are realizing the power of aligning investments with their mission and values. Demonstrating a commitment to prudent management of assets, sound financial returns, and positive social/environmental impact enhances stewardship opportunities, resonates with donors and mitigates potential reputational risks. As a result, nonprofits are adopting responsible investing criteria and guidelines into their investment policy statement (IPS). 

As a separate, and often smaller component of the organization’s overall assets, planned giving is often overlooked during this process. For nonprofits that administer planned giving programs, integrating responsible investing guidelines adopted for their endowment into the planned giving program investments presents several challenges.

Split Interest

Planned giving assets often include charitable gift annuity, charitable trust and pooled income fund assets. Each gift type is managed separately with its own investment objective based on the unique characteristics and composition of the gift. Planned giving investments must consider the risk tolerance and return objectives of both the income and remainder beneficiaries. The split-interest nature of a planned giving portfolio differs significantly from that of an endowment and must be considered when establishing the investment policies and guidelines, including socially responsible investment criteria. Care must be taken to ensure that the objectives of all parties are considered prior to implementation, which depends on the type of responsible investment criteria being considered, the investment vehicles available and the potential impact to expected risk/return. This can be particularly challenging when the responsible investment preferences of the donor supersede the willingness or ability of the nonprofit to implement.

Fiduciary Duty and Manager Oversight

The fiduciary standard of care requires that all investment decisions are made with reasonable prudence considering the interests of all stakeholders. This is particularly relevant for planned giving vehicles in situations where there are both income and charitable beneficiaries, and where the charitable beneficiary is also serving as trustee. The prudent investor standard (see box below) requires that a trustee exercise reasonable care, skill and caution to make and implement investment and management decisions, taking into account the purposes and terms and provisions of the governing instrument. Nonprofits must be able to demonstrate compliance with these standards through application of rigorous oversight of investment managers. To that end, responsible investing criteria must be clearly defined, documented in the IPS and monitored periodically to ensure that their investment managers are adhering to the guidelines and that any performance impact can be quantified. Trustees must ensure that their investment managers have policies and procedures in place to monitor the validity and effectiveness of any responsible investment vehicles in their portfolio. Otherwise, they are exposed to so called “greenwashing” or investments that claim to be responsible without any tangible social or environmental impact.

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The Application of Responsible Investing Criteria

The consideration of social, environmental or community impact is not mandatory when managing charitable funds. Therefore, the application of responsible investing criteria to the management of charitable funds is a form of discretionary management that falls outside of generally accepted standards of prudence. While this may change as responsible investment practices become more widespread, currently this introduces an element of fiduciary risk that nonprofits must weigh versus the reputational benefits of adopting their responsible investment guidelines. 

For example, a successor income beneficiary of a charitable trust may not share the same values or beliefs as the original donor, nor have the same affinity for the nonprofit as a fiduciary and remainder beneficiary. The perception, real or imaginary, of underperformance attributable to the responsible investment criteria, could lead to stewardship challenges or even legal action. Nonprofits should carefully evaluate and document the magnitude of the expected impact to portfolio diversification, returns and fees of adopting socially responsible criteria into their planned giving investments. In addition, nonprofits should disclose any socially responsible investment criteria to prospective donors. This additional level of due diligence will help to mitigate the risk of disputes with successor beneficiaries or other stakeholders.

Asset Size and Investment Minimums

Planned giving portfolios tend to be a small fraction of the size of the organization’s endowment and are broken into smaller accounts for each trust or annuity pool. Modest asset size limits investment choices of most planned giving accounts to pooled investments, like mutual funds and exchange traded funds (ETFs). These types of funds are managed for a broad set of investors and do not offer the opportunity for customized implementation of responsible investment criteria. Endowments, on the other hand, have the scale to purchase individual investments, giving the ability to select investments or managers that comply with their responsible investment criteria. While some planned giving portfolios are large enough to purchase individual investments for some asset classes like U.S. large cap equities, it is very unlikely that they have the assets necessary to hold individual assets in all asset classes.

A nonprofit’s ability to adopt responsible investing guidelines for its planned giving program portfolio hinges on how restrictive the criteria are and the availability of mutual funds or ETFs that meet the organization’s criteria. It is important for the planned giving IPS to acknowledge that the implementation vehicle will affect the degree to which an organization’s responsible investment criteria can be adopted, and address situations where a suitable investment vehicle is not available. Some organizations choose to utilize passive investment vehicles in asset classes where they are not able to implement their responsible investment guidelines while others choose to use funds that meet some, but not all, of the responsible investment guidelines. Whatever the situation, it is very important to document how implementation vehicles impact the investment manager’s ability to adhere to the responsible investment guidelines and provide the manager enough flexibility to maintain an appropriately diversified portfolio.

Social Impact Investing

At BNY Mellon Wealth Management, we define true impact investment as positive, measurable and intentional social or environmental benefits that also generate a competitive financial return. We believe impact investing is typically best executed in the private markets where effecting change and measuring impact is easier to do. In the private markets, managers take an active approach, driving capital toward impactful investments rather than through omission driven strategies. While these investments can be attractive for responsible investment mandates in an endowment, the size, frequency and unpredictability of planned giving cash flows makes an investment in illiquid investments with long-term commitments particularly impractical. While we recognize the importance of emphasizing societal impact in certain types of investments, the regulatory, liquidity and tax constraints associated with life income vehicles make social impact investments via private equity funds inappropriate for planned giving portfolios. We advise nonprofits to utilize perpetual capital in their endowments to make the long-term commitments necessary for successful social impact investments, and limit planned giving to traditional liquid investments, like stocks, bonds and mutual funds.

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Next Steps

As responsible investing trends are rapidly reshaping the philanthropic landscape for nonprofits, there is a new focus on adhering to values. Nonprofit organizations are responding to the call from their communities, donors and other constituents to align their investments with their values by adopting responsible investment guidelines in their endowments. As this trend accelerates, it is important for nonprofits to understand how responsible investments can be incorporated into their planned giving program portfolios in a way that is both meaningful and practical. This requires a thoughtful, deliberate and often laborious reconciliation of the organization’s responsible investment priorities versus what appropriate investment solutions are available to achieve these objectives. If done correctly, the resulting IPS can align the planned giving investments with the organization’s values without sacrificing the standards of care required for charitable funds.

 

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