August 26th, 2022
A new global survey of investment across the Not-for-Profit sector has revealed “residual uncertainty’ and found that Australian and New Zealand NFPs identified market volatility as their main challenge in the next three years, followed by inflation and low expected future returns.
According to the Mercer 2022 Global Not-for-profit Investment Survey, the sector uncertainty pre-dated the Covid-19 pandemic and Russia’s invasion of Ukraine and instead, focused on broader macroeconomic concerns and longer-term trends.
The survey of 133 NFPs ranging in size across 20 countries and six regions inevitably does not provide a deep sample of the breadth of the Australian and New Zealand NFP sector’s investment thinking but it does give some insight into trends and practices across some key areas, including investment strategies, net-zero, diversity, inclusion and equity and ESG considerations.
Sixty per cent of Australian and New Zealand NFPs surveyed identified market volatility as the main investment challenge leading up to 2025. A further 48 per cent nominated low expected investment, while another 48 per cent cited inflation as a challenge.
In that context, the survey also sought to identify where NFPs saw their opportunities in the immediate future. Globally, 65 per cent of survey respondents said diversifying away from their traditional asset classes was their prime investment opportunity, followed by 56 per cent who saw climate change as their next-biggest investment opportunity. In Australia and New Zealand, both categories were considerably higher with 76 per cent of NFPs nominating diversifying portfolios, while a further 68 per cent nominated climate change.
Two other options – investing in China and digital assets (including blockchain and cybercurrencies) did not register any interest as future investment opportunities among Australian and New Zealand NFPs.
Australia and New Zealand NFPs were only marginally behind the global trend among organisations in neither setting or planning to set a net zero target – the global figure is 63 per cent, and in Australia and New Zealand, the survey found, was 60 per cent. But 16 per cent of Australian and New Zealand organisations had already set a net-zero target (compared to 14 per cent globally), while 24 per cent said they planned to set a target in the next 12 months (23 per cent globally.)
One in two Australian and New Zealand organisations cited the main reason for not adopting a net-zero target as not being a board-level priority, while the second biggest reason – one in five respondents – was the cost for a fund of the organisation’s size.
On the question of diversity, equity and inclusion (DEI), 32 per cent of Australian and New Zealand organisations said they had set DEI targets for their organisation and 12 per cent for their manager selection. Globally, those figures are 35 per cent for organisational DEI targets and 16 per cent for manager selection.
The report also found an increasing interest among global NFPs to embrace private market investing – a potential source of higher return and diversification - which was supported by the guidance of external experts to help them navigate this kind of investment.
While 83 per cent of global survey respondents are either already incorporating ESG into their investment decisions or plan to do so in the next 12 months, that figure is up to 96 per cent among Australian and New Zealand NFPs.
When asked how their organisation incorporated ESG considerations into their investment decisions, 74 per cent of Australian and New Zealand NFP survey respondents said that they integrated ESG consideration into due diligence of their external managers and ongoing monitoring. A further 61 per cent said by excluding sectors or companies on the basis of ESG considerations. There were 22 per cent who mentioned impact investing.
Mercer’s Global Leader, Investment Solutions and OCIO, Michael Dempsey said NFPs had dealt with a huge increase in complexity since the global financial crisis, diversifying their range of investments to include assets such “…as high-yield debt, emerging fixed income, emerging equities and small caps.’’
“More recently, they’ve had additional issues to contend with – such as the inclusion of private markets as a new source of potential higher return and diversification, the increased urgency to achieve net zero and wider ESG requirements, and a sharp increase in market volatility as well as inflationary pressures and increasing interest rates,’’ he said.
“Education is key when looking at adding new strategies, and asset classes to portfolios, ensuring they are integrated with consideration for broader portfolio construction requirements, getting access to the right managers, ongoing oversight and reporting, and ensuring all this is achieved in a cost-efficient framework,’’ Michael explained.