The Funding Agreement Is an Investment Decision

Capital adequacy, financing restrictions and investment duration are not administrative details. They shape the conditions under which social value can be created.

A corporate investor approves R5 million for a youth employment programme. The implementing organisation has a credible track record, the intervention aligns with the company's social investment strategy, and the anticipated outcomes have been agreed.

The investment committee is satisfied. The funding agreement is prepared.

What follows may appear to be largely administrative. The parties finalise payment schedules, eligible expenditure, reporting requirements, renewal conditions and provisions for managing changes to the programme.

Yet these arrangements will influence almost every significant decision the implementing organisation makes over the life of the investment. They will affect its ability to recruit and retain staff, maintain essential systems, respond to changing circumstances and sustain relationships with employers and participants.

The funding agreement is therefore doing considerably more than governing the transfer of money. It is determining the conditions under which the intended social value can be produced.

This is the second argument emerging from GrowZA's research paper, The Investment Paradox: Capital Allocation, Investment Discipline and Social Value in South African Corporate Social Investment.

The first instalment examined what corporate social investment can learn from the discipline associated with private equity, while recognising the substantial differences between commercial and social investment. This instalment considers one of the most consequential implications of that comparison: the structure of financing is itself an investment decision, and its quality deserves scrutiny.

The difference between approving a budget and capitalising an intervention

Commercial investors generally recognise that an otherwise promising enterprise can fail because it is inadequately capitalised. The strength of the business model does not remove the need to finance the capabilities, systems and working capital required to execute it.

In social investment, the equivalent discussion is often expressed through the distinction between programme expenditure and overheads.

A proposal may include personnel, supervision, financial controls, technology, staff development, safeguarding, monitoring and institutional support. During budget negotiations, some expenditure is treated as directly attributable to beneficiaries, while other costs are classified as administrative or organisational.

This distinction can be useful for accounting and cost allocation. It becomes problematic when the accounting category begins to substitute for an assessment of economic necessity.

Consider an organisation delivering an employment intervention across several communities.

The programme depends on facilitators, employer relationships, placement systems, participant safeguarding and financial oversight. Some of these capabilities serve multiple programmes and cannot be allocated neatly to individual activities.

A funder might finance the visible delivery components while limiting contributions towards the institutional infrastructure that supports them.

The resulting budget may meet the funder's cost-allocation policy, but it does not follow that the intervention has been adequately capitalised.

Those excluded costs must be absorbed elsewhere, financed by another investor, recovered through unrestricted income or removed from the organisation's operating model.

Each possibility has consequences.

The question is not whether nonprofit overheads should be funded without scrutiny. Administrative expenditure can be inefficient, excessive or poorly governed. Institutional costs deserve the same examination of necessity, effectiveness and proportionality as programme expenditure.

The investment question is whether the proposed capital commitment covers the full set of capabilities reasonably necessary to produce the intended outcome.

Capital adequacy cannot be established by examining the activity budget alone.

The investment horizon must match the outcome horizon

A second financing decision concerns time.

Imagine a programme intended to improve employment outcomes over three years, but financed through a twelve-month agreement with renewal subject to annual approval.

There may be sound reasons for this arrangement. The investor may wish to test the intervention before increasing its exposure, manage uncertainty or preserve the ability to discontinue an ineffective programme.

However, the financing horizon has consequences that should form part of the original appraisal.

An organisation operating under annual funding uncertainty may be reluctant to offer longer-term employment contracts, invest in systems that require several years to generate returns, or enter partnerships that depend on continuity.

Management attention may also be diverted towards repeated fundraising and renewal processes rather than programme improvement.

These effects are not inevitable, and multiyear agreements are not inherently superior. A poorly designed three-year commitment can lock both parties into an ineffective arrangement.

The more useful principle is to distinguish the duration of a contractual commitment from the time realistically required to create and observe social value.

Where uncertainty is significant, staged financing may offer a sensible response. An investor could provide a multiyear investment framework with defined review points, transparent performance thresholds and provisions for adaptation or withdrawal.

Such an arrangement would preserve accountability while recognising that sustained outcomes may depend on a degree of institutional continuity.

The relevant question for the investment committee is therefore not simply how long the company is willing to fund a programme, but whether the chosen financing horizon is appropriate to the intervention's operating requirements and anticipated outcomes.

Restrictions are an allocation of authority and risk

Financing restrictions are often presented as mechanisms of accountability. They determine which expenditure is permitted, how changes must be approved and what evidence the implementing organisation must provide.

These provisions serve legitimate purposes. They can protect designated resources, prevent misuse, support regulatory compliance and preserve the integrity of an investment mandate.

But they also determine who is authorised to make decisions when circumstances change.

Consider a programme whose operating costs increase unexpectedly. The implementing organisation may identify an opportunity to adjust its delivery model, redirect savings from one activity towards another or respond to an emerging beneficiary need.

Whether it can act may depend on the flexibility permitted by its funding agreement.

A tightly restricted agreement may require approval before resources can be reallocated. That control may be justified where changes introduce substantial risk. In other circumstances, it can delay an appropriate operational response or impose additional costs on both parties.

The more fundamental issue is the distribution of risk.

Inflation, delayed disbursements, changing demand and interruptions to public services can affect programme delivery. Funding agreements frequently determine which party must absorb the financial consequences.

A restriction that protects the corporate investor from budget uncertainty may expose the implementing organisation to risks it has limited ability to manage.

This does not make the restriction automatically unreasonable. It means the allocation should be deliberate, transparent and defensible.

In commercial investment, risk allocation is part of the investment proposition. Social investment should be no different in that respect, although the mechanisms and objectives will necessarily vary.

The investor should be able to explain which risks are being controlled, why a particular restriction is necessary and whether a less burdensome arrangement could achieve the same protection.

When corporate policy becomes mistaken for regulation

South African corporate social investment operates within a complicated environment of B-BBEE recognition, tax requirements, corporate governance policies and contractual practices.

These are frequently discussed together, but they are not interchangeable.

Corporate social investment is broader than B-BBEE socio-economic development. A contribution's eligibility for B-BBEE recognition is not the same question as its eligibility for a section 18A tax deduction. Nor does the existence of regulatory requirements mean that every condition imposed by a corporate funder is legally mandatory.

This distinction is important because financing restrictions can acquire an authority that exceeds their actual origin.

A particular expenditure category may be excluded because of legislation, a verification requirement, board-approved policy or simply the wording of an agreement that has been used for years.

The effect on the implementing organisation may be similar, but the rationale for retaining or modifying the condition is different in each case.

The investment committee should be able to distinguish what is legally required from what is an internal governance choice.

That does not mean discretionary controls are illegitimate. Corporate policies can protect investors, institutions and beneficiaries. But they should remain open to examination against their purpose, administrative burden and consequences for the intended investment.

The GrowZA research paper proposes a restriction-origin framework precisely to support this distinction.

It asks investors to identify the source of material conditions and test whether the selected control is proportionate to the risk or obligation it is intended to address.

What does the South African evidence tell us?

Trialogue's 2025 State of CSI in South Africa offers a useful indication of corporate financing preferences.

Among participating companies, 91% reportedly would not consider unrestricted funding, while 80% would not consider funding reserves.

In a separate nonprofit respondent group, 59% reported having received unrestricted corporate funding.

The figures describe different samples and measures. They should not be treated as directly comparable or representative of every South African corporate investor.

Nor do they prove that funding restrictions undermine programme effectiveness.

They do, however, raise a legitimate question about why certain financing arrangements are preferred, how those preferences are translated into agreements and whether alternative structures receive meaningful consideration.

The same research paper notes that the Johannesburg Stock Exchange's 2025 sustainability reporting describes consideration of flexible or unrestricted support within its corporate social investment portfolio.

This demonstrates that corporate approaches are not uniform. It does not establish that any particular financing model is universally preferable.

The more productive research question concerns the relationship between financing design, organisational capability and social value.

At present, published corporate reporting provides considerably more visibility over investment priorities, expenditure and reported programme results than over the detailed reasoning behind funding agreements.

An assessment of the consequences of those agreements would require further empirical work, including examination of executed contracts, investor decisions and implementing organisations' experiences.

The evidence therefore supports closer investigation, rather than a sweeping conclusion that one financing model is superior.

The cost of apparently inexpensive programmes

One consequence of treating financing arrangements as administrative matters is that programme efficiency can be misunderstood.

Suppose two organisations propose to deliver similar interventions.

One includes the cost of supervision, financial management, technology maintenance, staff development and reasonable contingencies. The other presents a substantially lower budget by excluding some of these costs.

The second proposal may appear to offer better value for money.

But the comparison is incomplete unless the investor understands how the excluded capabilities will be financed and whether they remain available to support delivery.

The cheaper intervention may genuinely be more efficient. It may benefit from economies of scale, stronger existing systems or contributions from other partners.

Alternatively, it may depend on unrecognised subsidies, overstretched personnel or organisational resources that cannot be sustained.

A disciplined investment appraisal should establish which explanation is more credible before concluding that one proposal offers greater value.

This is especially relevant when social investment reporting privileges cost per beneficiary or the proportion of expenditure allocated directly to programmes.

Such measures are useful, but they are not complete assessments of investment efficiency.

The relevant economic question is what it reasonably costs to create a particular contribution to social value, including the institutional capabilities on which that contribution depends.

The cheapest route to an output is not necessarily the most effective route to an outcome.

Bringing financing architecture into the investment committee

The practical implication is that funding conditions should be considered during investment appraisal, rather than negotiated as a largely separate administrative exercise after approval.

A significant corporate social investment proposal should enable decision-makers to examine the intended social change alongside the financing arrangements required to pursue it.

The GrowZA research proposes a six-gate Investment Decision Framework, supported by an Investment Decision Note, to make these decisions explicit.

For financing architecture, the note would record the proposed amount and payment schedule, the duration and renewal logic, full-cost assumptions, material restrictions, risk ownership and the conditions under which the investment might be adapted.

Importantly, it would also record why those choices were made.

This creates an opportunity for investors to review not only whether the implementing organisation performed, but whether the financing decisions themselves remained appropriate.

If a programme experiences difficulties, a review could distinguish weaknesses in implementation from problems associated with capital adequacy, timing, restrictions or unforeseen external conditions.

If a programme succeeds, the investor could examine which features of the financing arrangement supported that success and whether they should inform future commitments.

The purpose is not to make every grant more complicated. A modest contribution towards a straightforward activity should not require the same appraisal process as a complex, multiyear investment.

The level of scrutiny should reflect the scale, uncertainty and institutional significance of the commitment.

What should remain consistent is the expectation that material financing decisions have a credible rationale.

The agreement is part of the investment

Corporate social investors have legitimate reasons to protect their capital, establish conditions and require implementing organisations to demonstrate results.

Those responsibilities are not in dispute.

What deserves greater examination is whether the financing structures designed to achieve these objectives are themselves contributing to, or constraining, the creation of social value.

Capital adequacy, investment duration, institutional costs, restrictions and risk allocation determine the choices available to implementing organisations. They influence continuity, adaptability and the capacity to respond to uncertainty.

Treating these arrangements as administrative details separates the investment decision from some of its most consequential features.

A more disciplined approach would bring them into the original appraisal and revisit them as evidence emerges.

That is not an argument for less accountability. It is an argument for more complete accountability, including scrutiny of the decisions made by those providing the capital.

The funding agreement is not merely the paperwork that follows an investment decision.

It is part of the investment decision itself.

About the research

This is the second instalment of The Investment Paradox, a GrowZA Editorial series based on the October 2026 research working paper by Craig Kensley, The Investment Paradox: Capital Allocation, Investment Discipline and Social Value in South African Corporate Social Investment.

The paper is an independent, desk-based policy synthesis examining investment governance, financing architecture and reciprocal accountability in corporate social investment. Its proposed Investment Decision Framework is conceptual and requires empirical validation.

Read the full research: The Investment Paradox, GrowZA Research.

Next in the series: Part 3 | Who Carries the Risk?

Why the distribution of uncertainty between corporate funders and implementing organisations deserves closer investment scrutiny.