Beyond the 5% Rule: Why charity trustees should invest for impact

Paul Ronalds, CEO, Save the Children Global Ventures Fri, 11 Jul 2025 Estimated reading times: 2 minutes

You can’t have your cake and eat it too. Or some would argue that if you want to generate social or environmental impact from your investments, you have to compromise financial returns. This debate matters because society desperately needs to unlock large, patient chunks of capital to use to scale innovations that can solve the planet’s biggest social and environmental challenges, writes Paul Ronalds, CEO of Save the Children Global Ventures.

I have just returned from the 4th Financing for Development Conference in Sevilla, Spain, where plugging the gap left by shrinking overseas development aid – the money governments give to fund health, education, nutrition and other programs in some of the world’s poorest countries – was a key focus.

And there is now evidence that if governments give even small ‘nudges’ to investors to consider impact – it can lead to significant growth in impact investing.

In Japan, its cabinet has formally committed to promoting impact investing in national strategies, such as the Grand Design and Action Plan for a New Form of Capitalism and the Financial Services Agency has played a role by publishing the Basic Guidelines for Impact Investment (in March 2024).

Last year, impact investing assets under management in Japan grew 150%.

If we can harness more private sector capital and invest it in areas that help address the sustainable development goals (SDGs), perhaps we can fill some of the current funding gap.

How can we attract the necessary capital?

But if mainstream investors have to trade off financial returns for impact on the SGDs, will we be able attract the necessary capital?

It is true the results of impact investing funds can be more variable and harder to generalise due to the diversity of strategies and the challenge of measuring impact.

And while this uncertainty may put off mainstream investors, what about investors with an explicit social or environmental mission, such as foundations, charities themselves and private ancillary funds?  

Donors to these organisations receive a tax deduction for their gift and the organisations generally receive a range of tax benefits.

These organisations have significant net assets.

In Australia, the net assets of all charities is more than $300 billion. A lot of this is invested in assets like buildings that might be used to run the charity’s operations but some is also invested in low-interest bank accounts, bonds or publicly listed companies.

This $300 billion number includes the net assets of foundations, private (PAFs) and public ancillary funds (PuAFs).

These mechanisms are growing rapidly in Australia.

Since 2000–01, the number of PAFs alone has increased on average by around 100 per year – or 6.7% per year, reaching 2,060 by June 2022.

These ‘giving funds’, which are set up for charitable purposes, provide an immediate tax deduction but allow the donated funds to be dispersed over a longer period.

PAF’s are currently required to donate 5% to a ‘charitable purpose’ each year and PuAFs just 4% (although the Australian Government has recently commenced a consultation process in relation to these rates). The remainder can be invested elsewhere – although revenue from investments must ultimately go to a charitable purpose.

Net assets of PAFs and PuAFs in Australia have grown strongly to reach $11.5 billion by 2019-20, according to Philanthropy Australia’s Giving Trends and Opportunities 2022 report. Yet annual distributions for 2019-20, while growing, has reached only $870 million. 

Giving funds can use their capital much more effectively

Given that impact investment funds can provide a financial return, there is an opportunity for all charities and especially foundations, PAFs and PuAFs to use their capital much more effectively, significantly boosting their social or environmental impact.

More conservative trustees may argue they must maximise their financial return so that they have the most to give away (I have some trustees at Save the Children that make this argument to me).

However, I don’t think that argument holds up to scrutiny in a world where there are many impact investing products that can align with mission, and where you can use catalytic investments from foundations and PAFs to leverage many times more capital for much greater impact.

Social returns can be as high as $13 for each $1 invested

A good example is our investment into early childhood development centres in Rwanda. In that case, we have accepted a low financial return (3%) to generate high social returns.

Estimates vary, but Nobel Laureate James Heckman’s research frequently cites social returns as high as $13 for every $1 invested, especially for programs targeting disadvantaged children.

But not all impact investments generate non-commercial returns.

We are developing an impact fund to invest in health start-ups in the Asia region and we will target a fully commercial return. In this case, we also think there is the potential for strong impact.

I am not suggesting trustees devote their entire corpus to such investments.

I also accept that there can be a trade-off between return and impact.

However, I do think there should be an expectation that trustees of charities consider both the impact they could have alongside their financial returns when making investment decisions.

Currently, a foundation trustee in Australia does not have any legal obligation to turn their mind to public benefit when thinking through their investment decision.

Reform is needed on how trustees are required to consider investments

In fact, some would argue, in my view, incorrectly, that they are prevented from doing this by the current trustee and corporations law in Australia.

This needs to change.

Requiring trustees to actively consider how they maximise their social or environmental impact in line with their charity’s mission including in relation to their investing activities could be a significant reform.

At the very least, guidance from the Australian Taxation Office or the Australian Charities and Not-for-profits Commission (ACNC) to say that charity boards and trustees can consider the social or environmental returns in making their investment decisions may, like the Japanese experience, provide a very helpful nudge.

At a time when Australia and the world is confronting unprecedented challenges, we have an urgent responsibility to use our available charitable resources much more effectively.

Main image: Paul Ronalds.

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