New ACNC guidance aims to help charities invest wisely, safely and within guidelines

It is important for the whole sector that charities are educated and competent when it came to investing, ACNC commissioner Sue Woodward told the Community Advocate.

“A poor decision could lead to unexpected losses that impact their organisation’s ability to fulfil its purpose – to help people or to further a cause,” she said. “Trust is the foundation on which the charity and NFP sector is built. It underpins donor confidence, volunteer engagement and the overall effectiveness of charity programs that the community relies on.

“The sector is traditionally viewed as one of our most trusted, but this trust can’t be taken for granted,” she said. “When there are concerns raised about one organisation that may be experiencing issues with financial management, there can be ripple effects. The reputation of that one organisation can be damaged, but that can tarnish the reputation of the sector as a whole.”

Woodward said that investing, when done well, was a powerful way for charities to strength their financial resilience.

“Charities and NFPs have to operate on a not-for-profit basis, but this doesn’t mean they have to just break even. In fact, generating profit strengthens a charity’s or NFP’s balance sheet,” she said. “It can build capacity to manage unexpected costs in the long-term, navigate short-term funding gaps and deliver greater impact in the community.

“With knowledge, risk mitigation strategies and a realistic plan, prudent investments can diversify an organisation’s income stream while good financial management practice is maintained. Our new guidance provides an overview of the key things directors needs to take into account if they are considering investing charity money”

The assets controlled by Australian charities add up to more than small change. According to the ACNC’s latest Australian Charities Report (11^th edition), released last June, Australian charities boast assets worth $319 billion, after liabilities.

Investing money makes sense, to generate income, to preserve or increase the value of existing reserves not immediately required for the charity’s mission, or to protect or grow funds tagged for future use, such as building works or equipment purchases.

The ACNC’s new guidelines are designed to help charities understand investment terms, consider risks and be aware of the responsibilities of key personnel to manage their charity’s financial affairs responsibly and diligently, while ensuring the charity stays on mission – as required under ACNC Governance Standard 5.

Woodward said Governance Standard 5 “spells out that directors must manage their charity’s financial affairs responsibly, and act with reasonable care and diligence. For charities that operate overseas, there are additional financial management requirements in the ACNC External Conduct Standards.”

“This new guidance highlights that there are many important matters to consider in this regard,” she said. “Directors need to demonstrate they have crafted an investment strategy with reasonable care and diligence, so those decisions are made in the best interests of their charity, to support it to carry out its purpose, its mission.

“We recommend you check your organisation’s governing document or any funding contracts to see if there are limits on the power to invest charity money. Check if there are other limits such as restricted reserve requirements, donor requirements or requirements set by other regulators.

“There are also a range of critical legal matters to consider, such as rules relating to your charity’s legal structure, its tax obligations, and responsibility to comply with regulations to protect against money laundering, counter-terrorism financing and slavery.”

The ACNC also made it clear, in releasing the new guidance, that it is good practice for charities to seek independent, expert advice regarding investments before taking the plunge.

The guidance says, “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.”

The guidelines cover all aspects of investing, from initial preparations to developing an investment policy, considering different types and purposes of investments, and detailing the fees and costs of investments.

They offer practical advice on how charities can check that potential investments meet environmental, social or governance (ESG) expectations, and avoid traps that could turn a strong investment idea into a threat to that charity’s standing, mission or viability.

Finally, Woodward said diligent record keeping was required to ensure charities had considered risks posed by private benefit and related party transactions in investment returns.

“A charity’s purposes must be for public benefit,” she said. “If investing charity money could result in a private benefit, you would need to demonstrate that any private benefit that may arise from investing is incidental – an unsought consequence or by-product of a decision that is in the charity’s best interests.”

More information

ACNC: ”Investing Charity Money for Financial Return”