Who Carries the Risk?

Corporate social investors are accustomed to managing financial risk. But the way risk is transferred through funding agreements may be undermining the very social value those investments are intended to create.

Risk does not disappear when it is transferred to someone else.

This is a familiar principle in commercial investment. When capital is committed, investors examine not only the probability of something going wrong, but who will bear the consequences, what capacity they have to absorb them and how those risks might affect the value of the investment.

In corporate social investment, similar considerations apply, although the relationship between the investor and the organisation receiving capital is fundamentally different.

The corporate funder generally controls the amount, duration and conditions of financing. The implementing organisation assumes responsibility for delivery, often in environments characterised by considerable uncertainty, limited financial reserves and dependencies beyond its direct control.

A funding agreement may establish clear contractual responsibilities between the parties. But contractual clarity does not necessarily mean that risk has been allocated intelligently.

This is the third instalment of The Investment Paradox, a GrowZA Editorial series examining the principles of investment discipline and their application to corporate social investment in South Africa.

The first instalment considered what social investors can learn from the investment reasoning associated with private equity, without importing its commercial objectives or ownership mechanisms. The second examined how capital adequacy, financing duration and funding conditions influence the prospects of creating social value.

This instalment takes the argument further by examining an uncomfortable dimension of social investment governance: the organisations expected to deliver social outcomes are not always the organisations best positioned to absorb the risks associated with delivering them.

Risk transfer is not risk management

Consider a corporate-funded programme providing skills development and employment support to young people.

The investor approves an annual budget, specifies eligible expenditure and requires the implementing organisation to meet agreed delivery targets. Payments are linked to contractual milestones, and material changes to the programme require prior approval.

The arrangement appears to establish accountability.

Now consider what happens when operating conditions change.

Transport costs increase. An employer withdraws from a placement partnership. A public-sector service on which the programme depends is interrupted. The number of participants requiring additional support exceeds initial assumptions.

The implementing organisation must respond, but its contractual ability to do so may be constrained by the terms of financing.

The funder may have protected itself against expenditure beyond the approved commitment. Yet the operational uncertainty has not disappeared. It has been absorbed by the implementing organisation, potentially through reduced reserves, delayed expenditure, pressure on staff or compromises elsewhere in its operations.

Not every such consequence is evidence of poor investment design. Implementing organisations are responsible for managing foreseeable operational risks, and investors are entitled to establish financial boundaries.

The problem arises when the financing agreement allocates substantial uncertainty without examining whether the party carrying it has the resources, authority or flexibility to manage it.

In those circumstances, risk may have been transferred contractually without being managed economically.

For an investor concerned with social value, that distinction should be consequential.

The unequal capacity to absorb uncertainty

One of the defining characteristics of corporate social investment is the difference in financial and institutional power between capital providers and recipients.

A corporate investor may operate within a diversified business, with access to treasury functions, legal expertise, reserves and established risk-management systems.

An implementing organisation may depend on a small number of funding relationships, carry limited unrestricted reserves and operate with little capacity to absorb an unexpected interruption in income.

These differences do not mean the corporate investor must assume every risk. They do mean that apparently symmetrical contractual obligations can have very different consequences for each party.

A delayed payment, for example, might be a manageable administrative event within a corporate finance department. For an organisation responsible for monthly salaries, transport providers or essential community services, the same delay can create an immediate liquidity problem.

A contractual requirement to maintain delivery despite changing costs may appear reasonable until the investor examines the organisation's actual financial capacity.

The relevant question is therefore not simply who has accepted responsibility for a risk, but who can manage that risk most effectively and what happens to the intended social outcome if that capacity is exceeded.

This is where investment discipline becomes relevant.

Commercial investors ordinarily consider whether an enterprise has sufficient working capital, appropriate financial buffers and the operating flexibility required to manage uncertainty.

Corporate social investment should examine the equivalent conditions, adapted to the realities of nonprofit delivery and public benefit.

An intervention that depends on institutional resilience cannot be assessed independently of the financing arrangements that support or constrain that resilience.

The restrictions we rarely interrogate

Funding restrictions are frequently treated as necessary instruments of corporate governance.

They can serve important purposes. Ring-fenced expenditure may protect donor intent, safeguard beneficiaries, support regulatory compliance and prevent resources from being redirected towards activities outside the approved investment mandate.

The argument is not that restrictions are inherently undesirable.

It is that they should have a demonstrable purpose and remain proportionate to the risks they are intended to manage.

Consider a restriction requiring prior approval before any material budget reallocation.

For a relatively stable programme, this may introduce little difficulty. For an intervention operating in an unpredictable environment, it could prevent management from responding promptly to emerging circumstances.

The value of the restriction depends partly on the cost of delayed decisions, the capacity of the implementing organisation and the nature of the expenditure being controlled.

The same applies to restrictions on reserves, institutional expenditure and contingency allocations.

A company may seek to ensure that its investment is directed towards programme delivery rather than retained within the recipient organisation. That can be a legitimate concern, particularly where there are questions about financial management or governance.

But an organisation without sufficient working capital or reasonable contingency arrangements may become less reliable precisely because it has limited capacity to withstand disruption.

The investor may succeed in restricting the uses of its funds while weakening the institutional conditions required to achieve its objectives.

This possibility deserves investigation rather than assumption. Not every restriction produces such effects, and unrestricted funding is not automatically more effective.

The appropriate test is whether the condition improves the investment's overall risk position and remains consistent with its intended social value.

What the South African evidence reveals, and what it does not

GrowZA's research paper, The Investment Paradox: Capital Allocation, Investment Discipline and Social Value in South African Corporate Social Investment, draws attention to financing preferences reported in Trialogue's 2025 State of CSI in South Africa.

Among participating corporate respondents, 91% indicated that they would not consider unrestricted funding, while 80% would not consider funding reserves.

These findings cannot be projected across all South African corporate investors, nor do they establish how individual funding restrictions affect programme performance.

They do, however, raise questions about the assumptions informing corporate financing policies.

If an investment requires an organisation to absorb unexpected costs, maintain operational continuity and respond to changing conditions, it is reasonable to examine how the organisation is expected to finance those capabilities.

International research provides a further basis for inquiry. The OECD's 2024 publication No Strings Attached? Making Sense of Flexible Financing in Philanthropy examines how financing arrangements interact with institutional autonomy, accountability and risk.

The useful lesson is not that unrestricted financing should replace restricted grants. Different interventions, institutions and risk environments require different instruments.

Rather, financing architecture should be evaluated as part of investment design.

The South African research also identifies an important regulatory distinction. Conditions arising from legislation, B-BBEE recognition requirements, corporate policy and contractual precedent should not be treated as interchangeable.

Some controls are mandatory. Others represent discretionary choices about risk appetite, governance and institutional trust.

Where discretion exists, the investor should be prepared to explain why a particular condition has been retained and whether an alternative arrangement could provide equivalent assurance at a lower operational cost.

This is particularly important when restrictions are passed from one funding agreement to another without renewed examination of their purpose.

The problem with transferring risk downwards

The consequences of financing decisions can extend beyond the relationship between a corporate funder and an implementing organisation.

When an organisation cannot absorb additional costs, those pressures may be transferred further into the delivery system.

Staff may face greater workloads. Suppliers may experience delayed payments. Programmes may reduce the intensity of support available to participants. Community-based partners may be expected to contribute resources that were not anticipated in the original investment.

These are possible transmission mechanisms, not established outcomes of every restrictive funding agreement.

But they illustrate why risk allocation should be assessed beyond the contractual boundary of the investor.

An agreement can protect the interests of the funding institution while transferring costs to organisations or individuals with even less capacity to bear them.

This raises questions about the distribution of both financial exposure and social consequences.

A corporate investor pursuing public benefit should be interested in these effects because they can influence the quality, continuity and fairness of the intervention itself.

Investment discipline cannot stop at determining whether the corporation's exposure has been contained.

It must also consider whether the structure chosen to contain that exposure is compatible with the value the investment seeks to create.

Better risk allocation does not mean weaker accountability

There is a legitimate concern that greater flexibility in social financing could reduce oversight, weaken financial controls or create opportunities for misuse.

That concern should not be dismissed.

Implementing organisations vary considerably in institutional capacity, governance quality and financial resilience. A financing arrangement appropriate for one organisation may be unsuitable for another.

A newly established nonprofit with limited financial systems may require different controls from an institution with audited financial statements, established governance and a long record of responsible delivery.

Similarly, a high-risk intervention involving vulnerable beneficiaries may justify stronger safeguards than a relatively straightforward grant supporting a defined activity.

The issue is proportionality.

A disciplined investor should connect each material restriction to a specific risk, identify the party best positioned to manage it and establish what will happen if circumstances depart from the original assumptions.

Where flexibility is permitted, it can be bounded by agreed thresholds, reporting obligations and review triggers. Where risks cannot reasonably be absorbed by the recipient, the investment may require contingencies, staged financing, revised payment terms or a different allocation of responsibilities.

These are matters of investment design rather than generosity.

The objective is not to shield implementing organisations from scrutiny. It is to ensure that accountability arrangements do not unintentionally compromise the outcomes they are intended to protect.

Making risk ownership visible

The research proposes a six-gate Investment Decision Framework to strengthen scrutiny of the decisions made by corporate social investors.

One of those gates concerns risk and controls. It asks whether financing restrictions are proportionate and whether risk has been allocated transparently.

The accompanying Investment Decision Note proposes documenting responsibility for foreseeable uncertainties, including inflation, operational interruptions, changing demand and other material shocks.

This would require investment committees to consider questions that may otherwise remain implicit in grant negotiations.

What could reasonably go wrong during implementation? Which uncertainties are within the recipient's control? Which depend on decisions made by the investor or third parties? What financial capacity exists to absorb disruption? Under what circumstances may funding conditions be reconsidered?

Recording these decisions would make it possible to examine their quality as part of subsequent investment reviews.

If a programme struggles, evaluators could investigate whether the original allocation of risk was reasonable given the information available at the time, rather than attributing every difficulty to implementation performance.

Equally, if financing arrangements successfully protect continuity and support adaptation, those practices could inform future investments.

The proposed framework remains conceptual and requires empirical validation. Its immediate value lies in establishing risk allocation as an explicit component of investment accountability.

The investor's responsibility does not end at the contract

Social investment necessarily involves uncertainty. Outcomes depend on human behaviour, institutional capability, public services, economic conditions and the decisions of multiple actors.

No funding agreement can eliminate these dependencies.

What investors can do is make more deliberate decisions about how foreseeable risks are distributed, which capabilities are required to manage them and how financing arrangements should respond when conditions change.

This requires a distinction between protecting the investor's capital commitment and protecting the value that commitment is intended to create.

The two objectives can reinforce each other, but they are not always identical.

A restriction may reduce financial exposure while making programme continuity more difficult. A flexible arrangement may increase managerial discretion while introducing governance risks that require additional controls.

Neither choice can be judged independently of its circumstances.

The central responsibility of the investor is to recognise those trade-offs and justify the resulting decisions.

Corporate social investment has developed extensive mechanisms for assessing whether implementing organisations have managed resources responsibly.

The next step is to apply similar scrutiny to the decisions through which those resources are financed.

Because the quality of a social investment is not established simply by how effectively the funder limits its own risk.

It also depends on whether the risks necessary to create social value have been allocated intelligently.

About the research

This is Part 3 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 examines investment strategy, financing architecture and stewardship, and proposes a six-gate Investment Decision Framework to strengthen investor-side accountability. It is an independent desk-based synthesis, and the proposed framework has not yet been empirically validated.

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

Next in the series: Part 4 | The Investor's Responsibility Does Not End with the Payment

Why stewardship, adaptation and investor learning should become part of how corporate social investment performance is assessed.