How Is Investing Different for Nonprofit Organizations?Share
Investments for nonprofits are critical to helping them pursue their missions. However, investing in any nonprofit operation is going to be different than it might be for a typical individual or business. Every nonprofit staff needs to be aware of these 5 differences in their organization's investing stance.
A nonprofit operation's goals will play a role in choosing the specific investments it goes after. It would be hard for a nonprofit aimed at decarbonization, for example, to credibly invest in oil companies. Many nonprofits need to look closer at their investment options to ensure the investments align with their goals.
Risk and Use of Money
Generally, the purpose of nonprofit investments is to provide enough sustainable growth to fund ongoing operations. This means downside risk is a bigger concern. A nonprofit that puts kids through college with scholarships, for example, needs to be sure the money will be there every semester. Consequently, nonprofits tend to avoid higher-risk investments because stability and the capacity to deploy money are far more important.
Even if a nonprofit wants to incorporate some upside into its portfolio, it has to consider more stable investments. While it might go after some aggressive positions in stocks, the nonprofit will still want to look at bonds and real estate that can provide a more stable financial footing for ongoing activities.
Legal, Grant, and Trust Restrictions
Many nonprofit activities are subject to restrictions imposed by governments, grantors, and trustees. These can strictly limit how much investing the nonprofit does. Also, the rules may direct a nonprofit to funnel profits into sanctioned activities rather than trying to keep growing the investments. Make sure your organization's investments fall within the guidelines of its charter and the applicable laws.
Investment activities can also bring unwanted attention. Especially if you're operating a nonprofit with a very public profile, it is important to think about how its activities might generate publicity. While it's possible to build certain ethical investing ideas into your public relations work, there can be challenges if unknown factors enter the picture. Also, public sentiment regarding acceptable investments can change over time so it's prudent to monitor developments.
A notable upside for many nonprofit investments is that they're usually subject to different tax rules. However, this means an organization needs to be careful about how it invests and disposes of its proceeds. Otherwise, there's a risk it might endanger its nonprofit status.
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