Introduction

Impact investing is defined as a method of solving problems while generating financial returns. This legal opinion clarifies that trustees now have an obligation to consider both financial performance and the societal impact of their capital investments. Historically, many trusts have only considered doing good with the profits derived from their capital, rather than investing the capital itself into causes that advance their charitable purposes.

Paradigm shift

A significant paradigm shift involves using a trust’s investments twice: first, by using income from capital for grants, and second, by placing the capital itself into investments that achieve direct charitable impact while remaining profitable. These mission-aligned investments address the specific problems the funds were originally set aside to solve. While the opinion focuses on trustees, the principles are likely applicable to other entities, such as incorporated societies, when looking at how to invest funds to consider the purpose for which the entity was set up.

Summary and examples

The Trusts Act 2019 enables a reframing of investment strategies by referencing the purpose of the trust and the necessity of bearing that purpose in mind when making investment decisions. Traditional fund management often focused on keeping capital safe in mainstream bank term deposits, which are purely financially driven. In contrast, the new approach encourages investing for impact before gifting. An example provided is an iwi-led education startup, which is purpose-driven and generates a financial return while educating people.

Part 1: Perceived barriers to impact investing

Many charitable organisations hold billions of dollars that could be used to achieve greater impact. However, common barriers to embracing impact investing include concerns regarding statutory and fiduciary duties, as well as restrictive Statement of Investment Policy and Objectives (SIPO) wording. Experience suggests that most impact investments perform as well as or better than traditional safe investments. Trustees are reminded that even non-impact investments do not always produce a market return, and they must undertake due diligence to ensure potential investments are actually having impact.

SIPO wording

A SIPO establishes the strategy and governance for a fund. If existing wording limits impact investing, the solution is to amend the document to allow for a wider conception of investing. Trustees should consider the context and objectives of the trust to maximise impact rather than solely focusing on maximum financial return. A SIPO can identify a specific percentage of funds to be allocated to impact investing, allowing trustees to dip their toes in the water before investing independently.

Considering fiduciary duties

The Trusts Act 2019 sits alongside common law and equitable principles. The relationship between a trustee and a beneficiary is fiduciary, with the duty of loyalty being fundamental. This includes avoiding conflicts of interest and not profiting from the position. Fiduciary obligations are based on trust and confidence, and while precise circumstances vary, the core loyalty to the beneficiary remains paramount.

Considering statutory duties

Statutory duties are divided into mandatory and default categories. Mandatory duties, found in sections 23 to 27 of the Act, cannot be modified and include the requirement to act in accordance with the terms of the trust and to further its permitted purpose. Specifically, section 26(b) mandates that trustees deal with trust property to further the permitted purpose. Default duties, such as the duty to invest prudently, apply unless modified by the trust deed. The landscape has changed with the Trusts Act 2019, permitting a wider view of what these duties entail.

Part 2: A reframing for duties and obligations of trustees

The new legal framework opens possibilities for trustees to look beyond just financial returns. Section 21 of the Act introduces a guiding principle requiring trustees to have regard to the context and objectives of the trust. This means considering the original reason for the trust’s establishment rather than just pursuing the safest possible investment. Principle 3 notes that trust terms can modify the duty to invest prudently to allow for investments with societal outcomes that may be harder to measure in traditional financial terms, such as education, culture, or poverty relief. If impact investing advances the trust’s purpose, trustees may actually have a duty to pursue such opportunities.

Overseas developments

Global trends reflect this shift. In the United Kingdom, the Butler-Sloss case confirmed that a trustee’s primary and overarching duty is to further the purposes of the trust, and the power to invest must be exercised to that end. In Australia, guidance from the Australian Prudential Regulatory Authority has indicated that regulated superannuation funds may incorporate environmental or social impact objectives if they are consistent with beneficiary outcomes.

Mission drift warning

Before adopting impact investing, organisations must ensure they have a deep understanding of why they exist. There is a risk of mission drift if funds are invested in anything good without a clear link back to the core purpose. Boards must be proactive and sharpen their focus on their why to ensure the impact investment arm and missional arm work in unison to advance the core purpose.

Part 3: Nine practical realities

Several practical realities should be considered during this paradigm shift. Change takes time, and involving stakeholders—such as staff, iwi, and donors—is essential. Trustees must explicitly instruct financial advisors to implement these decisions and ensure they possess the necessary skills. Starting small (for example, allocating 2% to 4%) allows for gradual learning and growth. Trustees must maintain focus on the overarching purpose and utilise appropriate legal tools, including hybrid options that blend charitable and for-profit approaches. Reporting on impact is crucial, using non-traditional metrics like the number of families housed. Finally, boards may need a new mindset or different skillsets to effectively measure impact and address double materiality, which considers an organisation’s external impact on solutions.

Part 4: Conclusion

The legal shift in New Zealand offers comfort to trustees that they can and should explore impact investing. Success requires a well-understood purpose and robust board discussions regarding the why and how of investments.

Appendix 1: Model statement of investment policy and objectives (SIPO)

A model SIPO clause should acknowledge that all investing has impact and avoid binary thinking regarding financial versus social results. It should seek mission-aligned investing through both negative screening of misaligned assets and proactive positive screening. For example, The Tindall Foundation’s SIPO aims to keep a significant proportion of its portfolio liquid for donations or impact investments at short notice, including specific loans to community organisations.

Appendix 2: What is impact investing?

Impact investing is described as a force that reshapes the world by moving beyond the separation of profit-making and problem-solving. It is an investment approach where capital generates financial return alongside social, cultural, or environmental returns. Resources from the Impact Investing Network and the Global Impact Investing Network provide further guidance on transforming how money is made while making a difference.