Investment governance for your organisation

The management and governance of an organisation is correctly driven first and foremost by its mission and strategic objectives. In this context, management must often grapple with maximising limited financial resources while retaining a balance between what is available and what needs to be achieved. 

Leaning too heavily on mission, rather than resources, can lead to financial difficulties, under-investment in infrastructure and legitimate concerns around sustainability.  However, just as undesirable is an organisation weighed down by an overemphasis on its finances to the detriment of its strategic objectives.  Finding a balance is the challenge in this instance.

Leading organisations are typically successful in matching their investment pool with their strategic intent. They have a deep understanding of the nature of their finances, the variability of those finances and their expected evolution in the medium term.  By stress testing future budgets and examining their ability to withstand a material change in their funding environment, they develop robust reserve and investment policies to withstand this. 

While many now embrace an element of investment risk, institutional organisations are traditionally conservative investors. However, the definition of conservative investment can vary from region to region and indeed from organisation to organisation.  To some, risk management in an investment context means capital preservation at all costs and to others it means preserving capital in real terms relative to inflation.

While a modest return would traditionally have been achievable with minimal risk via cash deposits or fixed income investments, achieving such returns in the current low interest rate environment inevitably requires some element of investment risk.  This is particularly true as inflation, either headline or more specific industry measures, begins to rise once more.

Source: Central Bank of Ireland, CSO

In addressing the investment needs of organisations, it is premature to begin by targeting a particular level of return. First and foremost, those responsible should understand the strategic objectives and capital plans of the organisation.  From there, it is possible to gain an understanding of the level of investment risk, if any, that  is required and that can be tolerated.   For some, simply maintaining real value will suffice while, for others, perhaps with significant capital plans or ongoing income requirements, embracing more investment risk will be necessary.

While most organisations will hold some reserves, the quality and depth of the policies governing the investment of these reserves can vary. Best practice investment governance begins with an Investment Policy Statement. Such a document sets the objectives for the institution’s entire investment process. The more expansive and informative the policy statement, the more durable it is likely to be under all market and economic conditions, but especially during periods of weakness and uncertainty.

An effective Investment Policy Statement apportions capital and reserves in an appropriate manner, provides a framework for investment strategy continuity and supports succession planning by helping directors familiarise themselves with the investment programme. Good investment governance also breeds trust and confidence and puts the organisation in a better position to attract funding.

At a high level, the following components are often included in such a policy statement:

1. Purpose of the investment pool
2. Capital tranches and their objectives
3. Investment strategy & asset allocation
4. Time horizon and liquidity
5. Required return and benchmarking
6. Responsible investment policy
7. Spending policy

All elements of such a policy stem from the first two items, documenting the purpose(s) of the investment pool and apportioning capital in a manner that ensures the sustainability of the organisation.

Reserves are segmented into tranches and rules are put in place around how these tranches may be invested.This will often involve embracing a range of asset classes, invested across multiple investment managers and, in many cases, reflecting the ethos of the institution through socially responsible investment.

In conclusion, effective investment can play a vital role in supporting organisations in maintaining long term structural balance.Married with a strategic vision, it can support the growth of their mission into the future.