Charity Investment Policy Statement – what to include?

This part of your IPS should clearly lay out what your charity is aiming to achieve through its investments. Think of it as answering the “why” and “how” behind your approach. This section helps set expectations and ensures everyone involved understands the charity’s priorities when it comes to managing its money.

You’ll want to cover things like:

• What’s driving your investment decisions? Are you purely focused on financial returns, or do you have mixed motives – like supporting your charitable programmes through mission-aligned investments?
• Do you have a target return? If so, over what time frame? Is your goal to preserve capital in absolute terms, or to protect it against inflation over the long haul?
• Are you focused on income, growth, or capital protection? Do you have a specific income target you’re trying to meet e.g., inflation plus 2%, 3%, 4% etc?
• Can you take a total return approach? If so, are you allowed – and comfortable –with drawing down on capital to meet your spending needs?
• Are there future spending commitments the portfolio will fund? If so, what level of capital is required to meet those spending commitments, and when is it ready to be liquid cash? This leads on to time horizons.

3.    Time horizon

Your charity’s time horizon – the period over which you expect to invest – plays a big role in shaping how much risk (see step four) you can reasonably take. Generally, the longer your time frame, the more flexibility you have to ride out short-term market ups and downs and aim for stronger long-term returns.

When investing, time horizons are typically defined as follows:

• Short term: less than 12 months
• Medium term: 1-5 years
• Long term: more than 5 years 

Some charities even split their investments into different “pots” based on timeframes, one for short-term needs, another for medium-term goals, and a third for long-term growth. This kind of structure can help align your investment strategy with your spending plans and risk tolerance.

4.    Risk

Defining your charity’s attitude to risk can be tricky; there’s no “one-size-fits-all” answer, and there are several types of risk that need to be considered. 

Capital risk: all investments go up as well as down, so you could get less than you invest. This is true for charities with short-term goals, since there may not be enough time to recover from a downturn. If your charity has a longer time horizon, you might be more comfortable with some volatility in exchange for potentially higher returns. When considering your investment risk, think about how much of a drop in value your charity could tolerate? Are your spending plans flexible, or are they fixed commitments? If they’re flexible, you might be able to take on more risk and aim for greater growth.

Inflation risk: Over time, inflation can erode the value of your money. If your investments don’t grow fast enough to keep up, your charity’s purchasing power could erode. Historically, the stock market has outpaced inflation over the long term, but there are no guarantees, and past performance isn’t a guide to the future.

Liquidity risk: Some investments are easier to sell than others. Shares and government bonds are usually quick to liquidate, but other assets – like property funds and private equity might be harder to sell.

Currency risk: If you invest in assets priced in foreign currencies, their value could drop if exchange rates move against you. It’s possible to remove currency risk by using various hedging strategies. 

Regulatory and governance risk: Some investments might be based in countries with looser financial rules than the UK, which could expose your charity to additional risks. 

5.    Cashflow requirements

Your Investment Manager needs to understand how your charity expects to withdraw money from the investments – both regular withdrawals and one-off lump sums. This helps to avoid any liquidity issues further down the line.

This section should include details of:

• Any plans to draw a regular amount from the investments?
• Whether this should come from income generated by the portfolio (like interest or dividends) or from capital.
• Any known one-off or significant spending needs in the future.
• Requirements to access capital at short notice. If so, you may want to set restrictions on how much of the portfolio is invested in less liquid assets.

6.    Ethics and responsible investing

If your charity has or would like to adopt an ethical investment policy, this section should explain how that commitment should be reflected in your investment decisions. Ethical considerations are an important way to ensure your financial strategy aligns with your charity’s values and mission.

For example, you might choose to implement a policy through negative screening, which involves avoiding investments in certain sectors – such as tobacco, fossil fuels, or arms manufacturing. Alternatively, or in addition, you may use positive screening to actively seek out investments that support your charitable goals, such as renewable energy or affordable housing.

Your charity might also engage in active stewardship, which includes voting on shareholder resolutions and engaging with companies to influence their practices in line with your values.

It’s also important to consider the scope of your ethical policy. Does it apply only to direct investments? Or does it also cover indirect investments made through pooled funds or other investment vehicles? If there are specific exclusions or preferences your charity wants to uphold, these should be clearly stated so your Investment Manager can incorporate them into the strategy.

7.    Ongoing management and reporting

Set out how you would like your investment manager(s) to communicate with your charity. This typically includes:

Frequency of reports – quarterly reporting is standard, but you can specify a different schedule if needed.

Content of reports – outline the key information you expect, such as:

• Portfolio performance
• Asset allocation
• Income generated
• Any significant changes or risks

Meetings – indicate how often you’d like face-to-face meetings with your investment manager (usually once or twice a year).

Authorised signatories – list who is authorised to make decisions or give instructions on behalf of the charity.

Governance structure – note whether your charity has an investment committee and describe its role in overseeing the investment relationship.

8.    Approving and reviewing

To end the document, it is a good idea to include:

• the date your charity approved the investment policy.
• when you will review it (once a year is typical unless there is a material change in your charity).

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