Allied Irish Banks : Growth and governance in the nonprofit sector report

Investment decision making in a low yield environment

Foreword

Welcome to this report 'Growth and Governance in the Nonprofit Sector, 2017'

Maura Moore Head of Nonprofits Sector Strategy

Allied Irish Banks, p.l.c.

In the summer of 2016, Allied Irish Banks, p.l.c. (AIB) and Irish Life Assurance plc (Irish Life) commissioned PwC to conduct a survey entitled 'The Irish Nonprofit Sector Survey'. The Nonprofit sector continues to face increased regulation as well as constrained public and private funding resources. The aim of this research and report is to provide key insights and guidance to Nonprofits to support them

in the management of these challenges. The sector spans a range of fields (Figure 1, p4), from health, education, sport, arts and culture, environment, development/ housing, religious orders and professional associations.

The research has identified three key themes for Nonprofits

- Financing Growth, Investment Management and Corporate Governance.

Public trust in the funding, governance and operation of some high profile charities in Ireland took another hit in 2016, but the research findings contained in this report point to a sector whose members are seriously embracing good governance, financial reporting, transparency, impact reporting and professional management. This commitment to best practice in all aspects of corporate governance is a direct driver of funding and investment into the sector.

The reporting regime for charities is changing presenting a challenge for Board members, management and practitioners. The Charities Act 2009 was commenced on 16 October 2014 and all charities were required to register with the Charities Regulatory Authority (Charities

Regulator). The draft regulations on the form and content of charities' financial statements and annual reports are currently being refined and finalised following a recent public consultation. They are expected to require larger charities to prepare their financial statements in accordance with applicable Financial Reporting Standards (FRS102) and the applicable Statement of Recommended Practice (Charity SORP (FRS102)).

The research shows management and boards are now seeking to keep their operations on a sustainable footing while also funding growth opportunities. This

necessitates a fine balancing act between risk and reward and management of the capital agenda. The interest

rate environment has made it harder for charities that traditionally relied on low risk and low yielding strategies, such as cash deposits and capital guaranteed products. Moreover many now need their investments to deliver higher returns to help fund growth and expansion.

Defining an investment charter and strategy for a Nonprofit requires focus and specialist expertise to make the most

of value creation opportunities whilst using a portfolio approach to manage risk and reward.

We believe that the additional knowledge sharing and methodologies described in this report are useful to those Nonprofits and trusts with existing well-honed investment strategies in order to benchmark themselves against others. For example, this report showcases performance trends across different asset classes during recent periods of market volatility triggered by economic and political shocks such as Brexit and the US election. The report may also

act as a helpful reference guide for boards, trustees and sub-committees who are now charged with balancing risk and opportunity and capital preservation.

Drawing on our extensive Nonprofits' sector experience, AIB supports clients, advises on best practice, draws on bespoke skills and experience both internally and with external partner firms such as Irish Life to create value.

We know that each Nonprofit is unique, yet successful players across diverse sectors also have much in common.

Aligning mission, capital and impact strategies helps to secure sustainability and growth, whilst optimising efficiencies and balancing risk attitude and appetite.

If Nonprofits wish to maintain the support of business, government and civil society, their boards and executive management need to be better informed so that their operational and strategic behaviour ensures long-term viability, underpinned by good governance principles, improved sustainability and a comprehensive investment strategy.

AIB and Irish Life acknowledge and thank all the individuals who took part in the research on behalf of their nonprofit organisation and who gave up their time, including PwC who undertook the research, and those guest contributors who were interviewed or shared insights on the dynamic on the ground in an environment of changing regulation, reserves management, increased reporting and disclosure requirements.

We hope that you find this report interesting and informative.

Maura Moore

Contents

Executive Summary

04

06

08

12

Research Methodology

Growth Outlook Investment approach

Governance

14

18

24

26

2016 Trends in Charity Regulation

Fundamentals of an investment policy

Maintaining Order: The Salesians of Don Bosco Ireland

Investing in a Low Yield Environment

30

31

32

Glossary of Terms AIB Customer

Financial Planning

Irish Life Investment Managers

2 AIB - Growth and governance in the nonprofit sector

EXECUTIVE SUMMARY

The results of the Nonprofit Survey carried out by PwC points to strong optimism about the future. A clear majority of organisations expect to grow rather than reduce or merely maintain current service levels while many expect to offer a wider variety of services or to expand their geographic coverage. This growth will bring its own challenges. Organisations will need to step up and consider how they fund expanded services and how enlarged entities are to be governed and managed.

The main findings of the Irish Nonprofits Sector survey research include:

Growth outlook

In all, 64% of respondents expect to see their organisation expanding the scope of their services and activities

with 14% planning to expand internationally. Of those organisations projecting growth 42% intend to offer new products or services, 24% expect to expand their missions, while 20% say they will move to new premises.

Some 32% said they expect to merge with other entities. This is to be welcomed as it offers potentially significant benefits in terms of cost sharing and resource efficiencies.

Investment Approach

Some 78% of respondents categorise themselves as low risk investors. Of those organisations with investment assets, 69% rank capital security as their top priority while almost three quarters (73%) ranked volatility as a top priority or somewhat important when thinking about investments.

The provision of income for ongoing activities was named as a goal by 52% of respondents. The creation of a reserve fund to cater for unforeseen needs was cited as important by 42% while 24% said they wanted to use it to smooth out irregular income streams. Funding capital projects was the objective of 44% of respondents and the funding of future as yet unspecified projects was a goal for 13%. Financing

the living costs of members was the dominant theme

among the religious orders surveyed.

expect to merge

with similar organisations

Half of the organisations intending to expand will use cash reserves to do so, 45% will seek grant funding while 43% will carry out fundraising campaigns. Only 8% of organisations expect to use debt to finance their growth.

There are challenges to be faced when it comes to financing growth. Those organisations which are largely dependent on government funding will likely have to turn more to external fundraising and philanthropic donations while those which are already dependent on those sources will face increased competition for funding.

Investment performance ambitions of the respondents were quite conservative with 42% having cash holdings only despite the historically low interest rates on offer; 23% of respondents have a deposit related objective and aim to outperform these cash deposit rates; 20% are

seeking to outperform inflation; while 40% of organisations with investment assets have no target at all or just a general long term objective.

The average return achieved by respondents was 3.5%. The highest return achieved was 14% while 21% had a zero rate of return. Those with an objective of beating deposit rates achieved an average return of 3.6% and those with an inflation related target did even better with an average return of 5%.

Investment decisions are made by the board in 59% of cases while less than half (47%) of the organisations with investment assets have a documented investment policy in place. 41% of respondents have some form of ethical investment policy in place. 40% use an external adviser to assist them with their investment strategies while 37% use expertise available internally; 17% take advice from their investment manager; and 46% use a combination

of external and internal sources.