ESG: An Opportunity for Nonprofits

khunt August 2023, Newsletter Tags:

Aug 10, 2023

In the for-profit world (and particularly among SEC-regulated companies), environmental, social and governance (ESG) planning has largely focused on compliance and risk mitigation. Given the mission-based orientation of nonprofits, ESG can be approached as an opportunity to grow their mission and impact in a rapidly changing world. The integration of environmental and social sustainability principles into nonprofits’ operational lifecycles will be key to ensuring donor retention and programmatic success for years to come.

The Rise of ESG Standards and Reporting
Over the past few years, multiple global ESG frameworks and standards have emerged to encourage sustainability strategies and provide guidance on sustainability reporting and disclosure. In the for-profit space, ESG reporting is often used to inform investment decisions, comply with regulations and/or give a company a competitive edge. At present, there is no universally followed standard in place, but there is movement toward consolidation of frameworks and standards. The International Sustainability Standards Board (the ISSB) recently merged with the Sustainability Accounting Standards Board (SASB). In addition, the Global Reporting Initiative (GRI) is a leading framework guiding corporate ESG transparency. Together, they are collaborating in an attempt to establish universal metrics for reporting greenhouse gas emissions, human rights protections, diversity, equity and inclusion (DEI) progress, and linkages to the United Nations Sustainable Development Goals.

In a few short years, the private sector has evolved beyond the early adopters who have expanded their corporate social responsibility efforts into broader ESG reporting. Today, companies understand the risk of being left behind if they do not adopt comprehensive ESG programming. ESG reporting is becoming the new normal, even for entities not beholden to SEC regulations. In the corporate space, ESG adoption is often a reactive response to the demands of investors, customers and other stakeholders. That said, nonprofit organizations will ultimately face demands from their stakeholders; however they are uniquely positioned to leverage ESG to enhance their mission and brand.

The Social License and Increasing Call for Transparency
Nonprofit organizations exist to serve individuals and communities where gaps in the market are unaddressed by the private sector or government. Their social license to operate comes with the benefit of tax exemption in exchange for providing services and transparency (e.g., IRS Form 990). As the nonprofit industry has evolved, so have reporting expectations. In addition to reporting to the IRS, nonprofits self-report an ever-increasing amount of impact and operational data to third-party evaluators such as Charity Navigator, GuideStar and Candid. ESG reporting is the next evolution of transparency reporting for nonprofits.

As nonprofit organizations are adept at reporting financials and an increasing amount of impact data, they must now navigate the evolving expectations related to ESG stakeholders. For stakeholders focused on the bottom line of mission impact, it must not come at the expense of unaddressed (or uncalculated) negative environmental impacts. For example, stakeholders expect nonprofits to understand their environmental footprint and develop strategies to mitigate it. BDO’s Nonprofit Benchmarking Report shows that 18% of nonprofits surveyed report evaluating their vendors, partners and/or funders for their alignment to ESG policies and actions. If that expectation has not been set for an organization today, it is only a matter of time before corporate donors or other stakeholders will expect to see disclosure and alignment. Donors who are accustomed to evaluating their own investments utilizing ESG indexes will be asking questions about the investment portfolios for endowments that fund a nonprofit organization’s programs. Foundations are increasingly aligning their endowments to ESG metrics utilizing the Global Impact Investing Network’s (GIIN) IRIS+ for measuring, managing, and optimizing their impact. Lastly, stakeholders who expect an organization to embody expectations of DEI will also expect reporting on established metrics that demonstrate evidence of progress.

An Opportunity to Grow the Mission
As nonprofit executives examine the industry landscape and their organization’s opportunity to thrive in the future, sustainability must become a key focus in all aspects of management. From attuning to evolving stakeholder priorities to ensuring continued access to donations and capital, and amplifying the impact of their mission, the integration of ESG principles into all facets of the nonprofit lifecycle will contribute to continued success. Indeed, leading industry organizations such as the American Red Cross have exhibited this imperative by incorporating formal ESG programs into their strategic plans.

Establishing ESG expectations at the leadership level can also drive adoption throughout the organization. Program staff can seize the opportunity to further integrate ESG elements and frameworks into program design, delivery and measurement. Development professionals can utilize ESG reporting to articulate insights attractive to individual, corporate and foundation donors. Communication and marketing professionals can tell a truly holistic story of impact. Finance leaders can ensure that their investments reinforce the organization’s mission.