ESG: Does it apply to charities?

Environmental, Social and Governance (ESG) is a phrase being used more often these days, and quite often people do not understand what it means, whether it applies to them or where they should start. It is also fair to say that ESG has not been a priority for most of the charity sector and rarely is it seen as an agenda item for board meetings. Now, however, may be the time that starts to change. This could also be the prime time to consider your charity’s ESG credentials and where you should start. A strong ESG strategy has the potential to separate you from your counterparts that are chasing the same funding, whether that be from government bodies, large grant making organisations or the general public.

What is ESG?

To avoid the possibility of confusing you further by using different terms in this article, it seems the right time to run through some key terminology…

ESG is traditionally a tool used by socially responsible investors for evaluating the behaviour of a company and how socially responsible that company is. ESG considers an organisation’s impact on all its stakeholders.

Each part of the phrase ESG comes with different criteria, some examples may be:

Environmental

• Waste and pollution
• Carbon emissions
• Deforestation

Social

• Employee relations and diversity
• Working conditions
• Impact on local communities

Governance

• Board diversity and structure
• Remuneration
• Policies
• Bribery or corruption in the supply chain

If an organisation is strong in each of the three areas and can clearly demonstrate their ESG credentials or even just a measurable plan, then the benefits can be rewarding.

The Environmental strand will also see me referring to carbon neutral and net zero, two phrases that are rarely fully understood and often get confused for one another.

In its most basic definition, carbon neutral is the process of calculating what your carbon emissions are and paying to offset those emissions using carbon credits.

Meanwhile, net zero is the process of calculating what your carbon emissions are, setting a strategy to reduce those emissions by 90% over a period of time and paying to offset the difference using carbon credits.

Why should charities have ESG on their agenda?

As previously mentioned, ESG was a tool largely used by listed entities and its investors, but in recent years there has been an increasing number of private companies looking to develop ESG strategies. This can help them to develop a competitive edge that can be rewarded in the form of more sales, greater employee recruitment and retention, developing a strong brand in a world that public expectation demands companies to do so, and let’s not forget the feel-good factor knowing they have done something good.

It is these very reasons that make it imperative for charities to follow the lead of the private sector and do the same. These reasons can easily be translated into the charity sector.

1. More sales

Whilst a charity is not necessarily selling a product in the same way we might think of a manufacturing company, they can be funded in a variety of ways. This could be through government funding, grants from large grant making bodies, reliance on the goodwill of the public in the form of donations and legacies, or perhaps you are selling a service, product or experience in the same way that a charity like The National Trust sell products and experiences.

Whatever your income streams are, it is likely that you are chasing the same funds as many other charities. Adopting a meaningful ESG strategy could prove to any of the funding organisations and individuals mentioned above that you have a genuine care for measuring and reporting your impact as a charity on all stakeholders. Few charities have a formal ESG strategy, and this could be a unique selling point for you.

In the private sector, some government contracts that go to tender now require companies to be able to demonstrate their commitment to being net zero, amongst other ESG requirements. This criterion is non-negotiable, and if a company cannot demonstrate its commitment, then they cannot apply to be awarded the contract. Whilst we have seen no sign of this in the charity sector yet, it would not be unsurprising if the concept does make its way into more government contracts, including those that fund charities, as it aims for the nation to be net zero by 2050 and more socially responsible.

2. Greater employee recruitment and retention

What has been more evident in recent years is the expectation from employees to work for a socially responsible employer. Particularly as organisations undergo a generational change, millennials and generation z are now quickly becoming the majority of a workforce and it is widely accepted that these generations put more importance on how much an organisation does for its employees and other stakeholders.

As a charity, it can sometimes be difficult to attract and retain the best people and encourage them to leave their job in the private sector or prevent them from joining one. Perhaps if charities begin to think slightly differently and implement a meaningful ESG strategy then those people that are considering leaving the private sector would take a leap of faith and join a charity. In short, a meaningful strategy that is well communicated could make it easier to recruit employees.

3. Public expectation and developing a strong brand

Aside from the expectation of donors and employees, the general public and beneficiaries of your charity’s services are starting to expect to see some changes in this area and their expectations are only growing.

A good example of this is the National Trust’s move to using more recyclable materials. You may be a member of the National Trust and receive their regular news booklet? Well, they are now delivered in compostable packaging. Get a takeaway coffee from one of their cafés? The cup is now recyclable.

The point is that these are now expectations of your audience, and they will favour the charities that are beginning to think in this way.

What can you do as a charity?

Funding is tight and inflation is running high so you may be worried about the potential cost implications but creating and implementing an ESG strategy does not have to be a significant cost to the charity. In fact, it may be you are already doing a lot of good things in this area and they just need to be measured and shouted about.

Here are some ideas for you to think about:

BCorp and Eevery self-assessment

You have most likely heard of BCorp. It is widely accepted as the epitome of authentication for ESG and socially responsible organisations. I am not going to suggest that you look to become a BCorp as a charity cannot be one. However, there is a self-assessment tool that you could use as a guide to see what you are doing well and what you need to improve on. You can find that here.

A slightly different platform that has been designed specifically for the measurement of your ESG credentials is Eevery. They require an annual fee of £720 plus VAT but for that you can complete their self-assessment that will provide a score for you in each of the relevant areas and give you action points to improve your score. This is a measurable way of being able to report your progress to stakeholders.

Investment portfolio

If you are fortunate enough to have an investment portfolio then have you considered what type of companies you are funding and who they are actually benefitting?

Quite often a charity’s portfolio is still being used to invest in companies with poor ESG credentials that are pumping fossil fuels into the world. The question is whether that is very charitable and does it fit with your charitable objectives?

Charities have historically been bound by laws to consider what investment policy will provide them with the best financial return, which could have been a limiting factor for Trustees when trying to make the decision to switch to a sustainable portfolio. However, in April 2022 two charities took to the High Court for clarity around what investment powers Trustees may be given. The High Court ruled that charities can use their investment portfolios to fight climate change even if it excluded investing in a large part of the market that may not, in the short term, provide as good returns on investment. Charity Commission are now changing their guidance to Trustees to reflect this ruling so it may be time for you to reconsider your investment policy.

Thinking sustainably

Just like my earlier example of The National Trust, are you thinking sustainably? Have you considered whether you are sending leaflets to people that could be printed using FSC certified recycled paper? Have you considered changing your light bulbs to LEDs? Which could be particularly beneficial right now with energy prices rising at the rate they are. Also, are you working with the most sustainable suppliers you can?

Some of these changes may not be at a significant cost to your charity but will make a difference. If you wanted to think on a larger scale then you may look to obtain consultancy advice on how to be carbon neutral or net zero, or even just to understand what areas of your business are the largest carbon emitters.

Staff survey

When was the last time you gathered the thoughts of your entire workforce? Have you ever done it? Do you even know how your employees are feeling? This does not have to be expensive. A SurveyMonkey or similar could be used to ask questions and understand how your workforce are feeling and what changes they would like to see to make your charity a better working environment. You may notice an improvement in engagement, a more open and honest culture and perhaps even some efficiencies from suggestions that have been made.

Summary

ESG is a new concept for the sector and generally has not been a board priority. However, with the change in public expectations and the need to be more attractive to potential donors perhaps now is the time for Trustees and Management Teams to start thinking about how they can make their charity a more attractive option. ESG could be a huge differentiator in this space with very few charities choosing to focus on it so far.

In fact, from a governance perspective it would be most responsible for Trustees to be thinking of their ESG strategy now.

For more information about the topic explored in this article, contact us here.