Delegation to Control: Strengthening Investment Governance for Charitable Organisations’ Portfolios
Using the scenario of a charitable organisation, with a clear mission and values, which manage significant investment portfolios (for example £200m) without an internal investment team, with the Board of Trustees delegating investment decisions to wealth managers, we can identify opportunities for improvement.
Unclear and undocumented governance roles between the Board and the wealth managers can risk undermining the charity's ability to manage its portfolio effectively in support of its key objectives such as its mission, including the application of any exclusion policies.
Based on our experience with clients, we suggest that the Board run our EDGE (Enhanced Diagnostic Governance Evaluation) tool to evaluate the level of investment governance within the organisation and identify improvements to better align the investments with their mission and objectives. This includes benchmarking against peer organisations.
The tool reveals the following key opportunities for improvement that could be addressed quickly:
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Clarifying the governance structure and responsibilities between the Board and the delegated wealth managers.
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Enhancing investment governance documentation and providing greater clarity in the investment policy statement.
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Aligning the charity’s investment portfolio more closely with its mission.
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Defining and communicating the charity’s exclusions and broader sustainability policy more clearly.
Based on these findings, we can support the Board of a charitable organisation by:
- Establishing Board sub-committee that include members external to the organisation to leverage their investment knowledge, especially where the Board has little investment expertise. Initially, these committees may be advisory only, with the Board retaining decision-making power on strategic issues.
- Rewriting of the Investment Policy Statement and the Board’s sub-committee’s Terms of Reference. This includes a clear procedure for setting the Strategic Asset Allocation based on beliefs, return objectives and risk tolerance.
- Clarifying and documenting investment beliefs to align mission and values with portfolio construction. For example, defining the investment universe (permitted asset classes), beliefs on return and risk, and preferences regarding active versus passive management for various asset classes.
- Including a section on sustainability and exclusions in the Investment Policy Statement (IPS) and defining a charity’s commitment towards net-zero target for the portfolio.
With these measures, the overall level of investment governance can be substantially improved for charitable organisations, aligning investment portfolio with their missions and values, clarifying governance responsibilities, and strengthening strategic oversight and sustainability commitments.