Corporations are increasingly responding to requests from employees, investors and business partners to create programs that address values-based issues. They’re often known as “ESG,” which stands for environmental, sustainability and governance, and the goal is to ensure that there are known processes and accountability in these areas. As an illustration of the prominence of these practices, companies registered with the U.S. Securities and Exchange Commission (SEC) may have to adopt new rules next year for including climate-related disclosures in their registration statements and periodic reports.
Even though they aren’t bound by these proposed new regulations, not-for-profits can consider ESG as an opportunity to express their core values to donors, staff and volunteers. It can bolster an organization’s reputation and increase donations since many donors expect the organizations they support to embrace social causes like ESG and diversity, equity, and inclusion (DEI).
Going Beyond Endowment Funds
Many not-for-profits only think about ESG in the context of how their endowment funds are invested. But investments are just the tip of the ESG iceberg.
To see the impact that ESG could eventually have on not-for-profit 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 not-for-profit organizations. Over time, however, these provisions have become regarded as best practices generally accepted as good governance for both corporations and not-for-profits. 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 not-for-profit sector. So it wouldn’t be surprising if ESG regulations currently targeting public companies trickle down to private entities, including not-for-profit organizations. This is especially true for not-for-profits that serve as suppliers or vendors to public companies subject to SOX regulations.
ESG and Boards
Not-for-profit board members often fall into one of two camps when it comes to ESG: either all-in or hesitant. The latter may believe ESG isn’t crucial to the organization’s mission or that it won’t materially impact its reputation. However, board members who understand the importance of ESG know that many supporters today care as much about how not-for-profits operate as they do the results.
Here are a few questions to help get the ESG conversation started with 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 not-for-profit organizations incorporate ESG into their operations:
- Analyze what is currently being done.
It is likely that some current activities fit within the context of ESG. Determine how these activities can be measured against a benchmark or list of ESG standards. For example, monitor and document energy and water usage savings in a building that is LEED certified.
- Examine governance structure.
How could the 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 may be already overseen by the board or a board committee. For example, an audit committee is probably overseeing risk management, including the internal control structure; to establish a more robust ESG framework, track a wider range of metrics that might necessitate changes to the governance structure.
- Think about the narrative.
Is there a way to connect the organization’s story to the ESG plans of for-profit corporations and other stakeholders? Think about incorporating the ESG framework into corporate funding proposals. By aligning the organization with funders’ corporate ESG priorities, a not-for-profit can demonstrate how partnering together can help them achieve their ESG goals.
Start by examining the ESG reports of corporate funders—these will reveal what they value from an ESG perspective and where there may be gaps. Use this information to strengthen your funding proposal.
- Maintain transparency.
Make sure ESG activities are transparent to volunteers, staff, donors, and other stakeholders. For example, devote a section of your annual report to ESG, create an ESG dashboard and post it on the organization’s website, and include updates of ESG efforts in newsletters and other stakeholder communications.
Activating ESG priorities and processes does not have to be overwhelming. To demonstrate a true and transparent commitment to sustainability and ethical practices, it’s best to adopt an incremental approach. As new policies and procedures become known and successful, an ESG initiative can be expanded.