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Invest­ment regu­la­ti­ons for chari­ta­ble foundations

Investment regulations consist of a set of fundamental principles, responsibilities and tasks determined by a board of trustees to ensure a charity’s assets are managed optimally. If a charity’s investment activities are perfectly tailored to its needs, this can go a long way towards helping the charity achieve its objectives and ensuring that its work is sustainable.

1.     What do the invest­ment regu­la­ti­ons govern?

Isabelle von Jein­sen is an attor­ney-at-law respon­si­ble for the Centre of Excel­lence for Chari­ta­ble Foun­da­ti­ons at Credit Suisse (Schweiz) AG.

They define the objec­ti­ves, funda­men­tal princi­ples, orga­ni­sa­tion and moni­to­ring asso­cia­ted with the invest­ment process, and include a trans­pa­rent invest­ment strategy.

2.     Why are invest­ment regu­la­ti­ons needed?

A clear invest­ment stra­tegy is always needed for asset manage­ment. This stra­tegy should be drawn up with care and laid down in the invest­ment regulations.

At the same time, the regu­la­ti­ons detail who (e.g. all the members of the board of trus­tees, a commit­tee or the mana­ging direc­tor) should handle parti­cu­lar tasks and respon­si­bi­li­ties connec­ted to invest­ment policy and strategy.

Silvan Schee­rer works in Credit Suisse’s SAA Advi­sory team and is jointly respon­si­ble for advi­sing private and insti­tu­tio­nal clients on strategy.

3.     How is the invest­ment stra­tegy deci­ded upon?

For a charity, asset manage­ment is inten­ded to ensure that there are enough funds avail­able for the charity to attain its objec­ti­ves, even in the long term. As a result, a balance needs to be struck between invest­ment risk and risk capa­city, and conse­quently, the follo­wing aspects should be into account:

  • The charity’s deed and objec­ti­ves repre­sent the scope of the invest­ment strategy.
  • The invest­ment stra­tegy should gene­rate enough return for the charity to be able to imple­ment the projects it has plan­ned and/or award funds. In this respect, the first step invol­ves calcu­la­ting the finan­cial scope of the funding to be given out.
  • In addi­tion, costs (e.g. for admi­ni­stra­tion, asset manage­ment and audit­ing) and infla­tion should be taken into account so that the real value can be main­tai­ned in the long term.
  • The amount of the returns thus calcu­la­ted deter­mi­nes the invest­ment risk that needs to be taken to achieve the desi­red returns.
  • Next, the invest­ment risk should be contra­sted with the charity’s risk capa­city and risk tole­rance. Risk capa­city refers to the extent to which the charity can weather fluc­tua­tions in value from a finan­cial perspec­tive, and is deter­mi­ned by the invest­ment hori­zon and the freely avail­able assets. Risk tole­rance illu­stra­tes how inve­stors react to losing assets.

If the risk of the invest­ments exce­eds the charity’s risk capa­city and/or its risk tole­rance, the invest­ment risk needs to be redu­ced as a matter of urgency. In turn, this leads to lower target returns and often redu­ces the finan­cial leeway available.

4.     Can an invest­ment stra­tegy be used a vehi­cle for giving out funding?

In addi­tion to provi­ding direct funding, chari­ta­ble foun­da­ti­ons can also have a posi­tive indi­rect influ­ence via the finan­cial markets and incor­po­rate this in their invest­ment regu­la­ti­ons. In addi­tion to risk and return figu­res, sustainable approa­ches to asset manage­ment take envi­ron­men­tal (E) and social (S) aspects into account, as well as crite­ria rela­ting to good gover­nance (G). This means that they can rule out inve­sting in compa­nies that rank poorly in terms of ESG. If achie­ving a speci­fic goal is the focus of their actions, a direct loan might be made to a social enter­prise, for example. The invest­ment stra­tegy can be deve­lo­ped and imple­men­ted using a charity’s own resour­ces and/or through colla­bo­ra­tion with third parties. The board of trus­tees should analyse the invest­ment stra­tegy in question every two to three years, unless parti­cu­lar circum­stan­ces mean that steps need to be taken earlier. 

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