What is ESG and five reasons it matters even if you are a charity

Big corporates have been preparing for legislation about ESG for several years. They are required to report about it, as do large charities. Most of the focus is on how to report it.

British Business Bank explains ESG like this:

“ESG is a collective term for a business's impact on the environment and society as well as how robust and transparent its governance is in terms of company leadership, executive pay, audits, internal controls, and shareholder rights.

It measures how your business integrates environmental, social, and governance practices into operations, as well as your business model, its impact, and its sustainability.

The three components that make up ESG are environmental, social and governance.”

The environmental aspect focuses on how organisations minimise their impact on the environment and care for the world around them.

The social aspect focuses on how organisations impact wider society and workplace culture, i.e. how you care for people.

Governance refers to stewardship, i.e. the processes of decision-making, reporting, and the logistics of running an organisation, particularly the sustainability-related risks, opportunities and impacts.

Ironically, charities have helped drive this innovation — acting as watchdog groups and advocates – and benefitted from it as part of large companies looking for things to report about how they do good. But I don't know many charities that even use the term, let alone monitor or can report on it.

Five reasons ESG matters, whatever your organisation

While full ESG reporting is inappropriate for most charities, there are five compelling reasons to start thinking about it and considering it in your planning and decision-making.

1. Future-proofing for potential legal requirements
2. Fundraising from corporates and businesses
3. Getting donations from the public
4. Maintaining your reputation as a “good and ethical” organisation
5. Getting grants and funding, particularly public sector

1. Future-proofing for potential legal requirements

From a legal perspective, the Financial Conduct Authority already requires the most prominent listed businesses to state whether their financial announcements align with particular climate change-related criteria and explain areas where they are not.

These requirements are only likely to become more stringent as the UK moves towards its goal of net-zero greenhouse gas emissions by 2050. There is no overarching piece of UK legislation covering all ESG factors. (see the ebook for the details of what does apply.)

Suppose you currently deal with businesses or larger charities impacted by the legislation and guidelines, or you might do in the future, and they have to report their environmental impact. In that case, they will want your information as part of their "supply chain".

Hopefully, you are already tracking your social impact, which is also part of ESG.

The most likely immediate practical legal impact affecting many people is the introduction of clean air zones and the potential charges either staff have to pay, or your vehicles have to if they don't meet the guidelines. You can find out where the clean air zones are here and check if a vehicle is liable to pay a charge by entering the registration details. Even if you are not close to such an area, one may be coming, so it needs to be factored into planning and potentially funding bids.

The direction of travel towards increasing ESG regulation is clear, so any UK organisation for profit or not-for-profit must consider the potential impact on them.

You can gain a competitive advantage through early ESG monitoring and reporting implementation. This will give you data to show how you have acted and improved, which you can use in general publicity and targeted approaches for support from funders, companies and the general public. Working early to incorporate ESG monitoring and reporting into a corporate strategy as well as giving a competitive advantage, can build corporate reputation and insulate against future compliance risk. Research has found that up to half (48%) of investors are looking to increase their ESG investments within the next three years. Social investors will expect their investments to meet ESG standards; being a charity or social enterprise is unlikely enough if you can't evidence it.

2. Fundraising from corporates and businesses

You can talk about ESG to get their support, as supporting a charity will help them fulfil their "social" element of the reporting. Suppose you can also show that their support will help you, for example, by being more environmentally friendly. In that case, they can claim some of your savings, e.g., the funding of energy-efficient lighting for you.

Providing evidence that businesses can use in their ESG reporting will make you a more attractive organisation to fund. Conversely, some fundraising activities are being scrapped because companies won't support them because of their environmental impact, such as team-based races using old bangers. Below is a diagram of the issues major companies need to consider now.

3. Getting donations or sales from the public

With the current cost of living crisis, people have less money to donate. The stronger you can make your argument about why you should be supported, the more you strengthen your argument that you should get their money. You will likely be doing things you don't shout about, such as using local suppliers or involving many volunteers to improve their lives. You can also appeal to different potential supporters by asking for support to make you more ‘green’, such as installing a water butt or low energy lighting or insulation.

Strengthening your case regarding the environment is also likely to attract more volunteers, particularly younger people.

If you are selling to the public, then research by McKinsey found that over 70% of people said they would pay an additional 5% for a green product if it met the same standards as non-green alternatives.

There is also growing evidence that consumers increasingly prioritise ethical and environmentally conscious brands and products, and awareness has grown following the pandemic. For example, a 2020 survey of 3,000 people across eight countries by Boston Consulting Group (BCG) found that 87% thought companies should integrate environmental concerns into their products, services, and operations more than in the past.

4. Maintaining your reputation as a “good and ethical” organisation

Incorporating ESG reporting into your organisation could help your reputation. It indicates a transparent plan focusing on helping the environment, supporting diversity and equal opportunities, and ensuring ethical decisions. Environmental, social and governance issues are critical to the communities you serve and the planet where we all live and work. Nonprofit organisations have a particular need for transparency and accountability as public charities who operate with substantial tax benefits. And increasingly, donors are paying more attention to how nonprofits conduct their work rather than simply what they do in communities.

Additionally, highlighting how good you are as an employer will help recruitment and attract local support and position you ahead of the game compared to most charities. Being a charity is not necessarily enough to attract staff, particularly with press stories about organisations like the RNLI making headlines on bullying and sexism. Some employees may want to work in more eco-conscious companies committed to implementing favourable ESG policies.

Employees may want to associate themselves with organisations that foster a diverse and inclusive workplace, with employee support programmes for mental well-being and improved work/life balance. Implementing measures to boost diversity and inclusion in the workforce can have a profound positive effect when attracting and retaining talent and getting the best performance from people. Working environments that promote health, well-being and a good work-life balance are not just excellent credentials for recruitment but also minimise the challenging and costly impacts of high staff turnover and employee burnout.

The ESG agenda fits with the charity commission's governance code, so it will help you meet the accepted good practice (see more here). The ACCA also has some advice about how smaller charities can do things to fit within ESG reporting.

5. Getting grants and funding, particularly public sector

Funders love to feel they are making their funds work hard, so if you can show how by thinking about ESG, you have reduced direct costs and gained efficiencies, this will strengthen your case. For example, reducing energy costs, such as switching to LED lighting, could lower overheads through smaller energy bills. This will appeal to funders that you are using money effectively and will make their precious funding go further, allowing you to do more good.

Meanwhile, investors, especially large institutional funds such as pension funds, are increasingly looking to back sustainable companies that will deliver reliable returns over the long term. Therefore, demonstrating responsible business practices is crucial to making an organisation stand out from its competition and attract investment. This outlook is likely to be mimicked by the large funders.

To build the case to present to funders, you obviously need to measure and monitor metrics such as energy and raw materials consumption that can lead to efficiencies and cost reductions. Similarly, showing how funding will help you achieve long-term plans to improve performance regarding ESG issues could make your application stand out. Adding details in an application about topics such as board diversity and environmental and social risk oversight will also illustrate your focus on ESG and reinforce your image as a “good” organisation.

While ESG is a tool to enhance your organisation’s reputation, more importantly, it is also a way to measure and improve an organisation’s financial performance, which will appeal to funders.

Next steps

1. Email sarah@inspire2aspire.co.uk to get our ebook
   ESG - the details and relevance to charities and social enterprises
   This will provide you with more detail and includes the diagram above summarising topics
2. Ensure ESG is a standing item on the board agenda and that the board has access to expertise and comprehensive information around ESG issues so it can adequately support the organisation.
3. Which issues are most relevant to your charity or social enterprise? Examples include

• Social justice
• Diversity
• Human rights
• Healthy communities
• Environmental sustainability

4. Think about what is important and what you could do/measure (the ebook has a lot more detail and links) – maybe find a volunteer or trustee interested in the area or involved in their job.

5. Identify what you will do with the information, your core audiences (funders, supporters, donors, council) and how you will communicate it.

6. Keep aware that guidelines change, such as when new vehicles will all have to be electric, 2030 or gas boilers will be banned and heat pumps required, or straws can't be plastic. A change may be relevant to you. ESG regulations will surely become more numerous and rigorous in the coming years.

Conclusion

As populations across the globe struggle with record-breaking heatwaves and intense rainfall, it is clear that progress on climate action has either been too slow or too late. With increased regulation already on the way and significant supply chain disruptions, and rising operational costs on the horizon, the next wave of challenges facing organisations will be altogether new and uncharted.

Failure to prepare now could be catastrophic. It may threaten the viability of your organisation.

If you enjoyed this, you might find the following useful:

Good charity governance - the highly tuned mechanisms that help you fulfil your purpose

An idea to help smaller charities

Top ten tips about how to get the most from your trustees