There is a good chance you have heard the term ESG, which stands for environmental, social, and governance. ESG is a framework used to assess how corporations are addressing various sustainability and ethical issues. The role of an ESG program is to ensure corporate accountability and to confirm the presence of processes designed to manage a business’s impact in each of these areas.
The U.S. Securities and Exchange Commission (SEC) has proposed rule changes that would require SEC-registered companies to include certain climate-related disclosures in their registration statements and periodic reports. Final rules and an implementation process could be adopted later this year.
But what about nonprofit organizations? Should ESG matter to your nonprofit?
Going Beyond Endowment Funds
Many nonprofits today only think about ESG in the context of how their endowment funds are invested. But investments are just the tip of the ESG iceberg.
ESG provides a way to express your core values to donors, volunteers, and staff. As a result, focusing on ESG can bolster your nonprofit’s reputation and increase donations. Many donors expect the organizations they support to embrace social initiatives like ESG and diversity, equity, and inclusion (DEI). Failure to do so could lead to a loss of donor support.
To see the impact that ESG could eventually have on nonprofit organizations, look no further than the passage of the Sarbanes-Oxley Act (SOX) in 2002. Passed in response to high-profile financial scandals at corporations like Enron and WorldCom, this legislation contains provisions intended to deter and punish corporate accounting fraud. Section 404 of SOX requires companies to publicly report on management’s responsibility for establishing and maintaining an adequate internal control structure.
Most SOX provisions did not originally apply to nonpublic companies and nonprofit organizations. Over time, however, these provisions have become generally accepted as good governance for both corporations and nonprofits. Some of the concepts that evolved from SOX were added to IRS Form 990 via a new section on governance, though they are not requirements.
There are other examples of regulations governing for-profit corporations that impacted the nonprofit sector. So it would not be surprising if ESG regulations currently targeting public companies trickle down to private entities, including nonprofit organizations. This is especially true for nonprofits that serve as suppliers or vendors to public companies subject to SOX regulations.
ESG and Your Board
Nonprofit board members often fall into one of two camps when it comes to ESG: either all-in or hesitant. The latter may believe ESG is not crucial to the organization’s mission or that it will not materially impact its reputation. However, board members who understand the importance of ESG know that many supporters today care as much about how nonprofits operate as they do about the results.
Here are a few questions to help get the ESG conversation going with your board members:
- What material issues do donors and stakeholders view as relevant?
- How can we create realistic ESG goals and incorporate them into the strategic planning process?
- How will we publicly report ESG initiatives and progress?
- What resources can help us learn more about ESG?
Planning for ESG
Here are four strategies that can help your nonprofit organization start planning to incorporate ESG into your operations:
1. Analyze what you are currently doing. Chances are some of your current activities fit within the context of ESG. Determine how you can measure these activities against a benchmark or list of ESG standards. For example, if your building is LEED certified, monitor and document your energy and water usage savings.
2. Examine your governance structure. How could your current governance structure be enhanced to provide oversight for certain aspects of ESG? What role should the board or board committees play in this oversight? Some metrics commonly tracked as part of ESG are already overseen by the board or a board committee.
For example, the audit committee is probably overseeing risk management, including the internal control structure. If you want to establish a more robust ESG framework to track a wider range of metrics, you might need to make certain changes to your governance structure.
3. Think about your narrative. Is there a way to connect your organization’s story to the ESG plans of for-profit corporations and other stakeholders? Think about how you can incorporate your ESG framework into corporate funding proposals. By aligning your organization with funders’ corporate ESG priorities, you are demonstrating how partnering together can help them achieve their ESG goals.
Start by examining the ESG reports of your corporate funders—these will reveal what they value from an ESG perspective and where there may be gaps. You can then use this information to strengthen your funding proposal.
4. Maintain transparency. Make sure your ESG activities are transparent to your volunteers, staff, donors, and other stakeholders. For example, you could devote a section of your annual report to ESG, create an ESG dashboard and post it on your website, and include updates on your ESG efforts in newsletters and other stakeholder communications.
Demonstrate Your Values and Commitment
A growing number of donors today want to be affiliated with organizations that share their values. By focusing on ESG, you can demonstrate your values to stakeholders, along with your commitment to sustainability and ethical practices.
It is smart to start out small and then expand your ESG efforts over time as you become educated and grow more comfortable with the concept. This will enable you to make incremental progress in ways that align with your organization’s mission and values.
ESG and the American Red Cross
With its mission of alleviating suffering in the face of emergencies worldwide, the American Red Cross has made a major commitment to fighting climate change in an effort to protect the communities they serve and the planet. This includes appointing a chief sustainability officer to oversee an organization-wide ESG program and approving an overall ESG framework.
The Red Cross published its first ESG report in late 2022. The report was prepared in accordance with sustainability reporting standards issued by the Global Reporting Initiative. It includes four pillars: environment, social-mission delivery, social-workplace and organizational culture, and governance.
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