SONI Results – Charities – ESG/SRI Restrictions

The rise of Socially Responsible Investing (SRI) enables nonprofit organizations to better align their mission and vision with the investments they choose to make. When thinking about implementing an SRI policy, a variety of issues need to be reviewed and documented before being added to an Investment Policy Statement (IPS).

The first step in developing an SRI component to your IPS is identifying which specific criteria your organization would like to avoid or emphasize in order to have its values reflected in its investments. We recommend implementing a thorough process to make sure that all board members are in agreement about what values are to be reflected and to make sure they are not personal values, but organizational values.

Next, determine whether direct or indirect exposure to the companies your organization wishes to exclude or promote in the portfolio is acceptable. Direct exposure comes from buying individual companies’ securities on the open market, while indirect exposure reflects owning shares of a mutual fund or Exchange Traded Fund (ETF) where a fund manager purchases securities as holdings of the fund.

If the organization is comfortable with indirect exposure to the companies it wishes to exclude then all mutual funds and ETFs could be used as investment options since your organization wouldn’t directly hold shares of those companies. If your organization is already invested in mutual fund or ETFs then no changes would be required from the addition of an SRI policy. If your organization is not comfortable with indirect exposure, your investment options become limited to SRI funds or separately managed accounts. When choosing SRI-focused mutual funds or ETFs, make sure to review the fund’s prospectus to analyze the fund manager’s screening criteria and confirm that they align with the goals and objectives of your organization’s SRI policy.

Determining which companies your organization wishes to avoid or emphasize, along with the type of exposure to those companies that is acceptable, will lay the foundation for implementing a socially responsible investment plan for your organization.

We noticed a significant jump, from approximately 25% to more than 40%, in the percentage of nonprofits reporting policy guidelines related to investing in a socially responsible manner. We have noticed interest in aligning organizational values with investments in our own clients as well. This feels like an important and positive trend and we strongly believe that organizations that reflect their values in their investment decisions are not doomed to lower performance expectations. And while those that reported not having SRI policy guidelines reported better performance in 2020, we also note that those organizations reported investing less in alternatives, less in cash, and more in stocks – compared to the group that reported including SRI policy guidelines. It is likely that the allocation decisions had a more material impact on returns than did any ESG/SRI restrictions.

This report summarizes an informal study compiled by analyzing the survey results of nonprofit finance executives. The views expressed herein are opinions reflecting the best professional judgment of Raffa Investment Advisers (RIA). This report is for informational purposes only. Participant responses have not been verified or audited. The information contained has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information. Data analysis was performed by RIA. Nonprofits from our internal marketing database and a national external nonprofit database were solicited by direct email to participate in the SONI survey. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from RIA. Every participant did not answer every question in the survey. Percentages are based on number of participants that responded to each question, not total number of participants, unless otherwise indicated.