Why is ESG relevant to organisations with a social purpose?

At the end of March, audit firm RSM released research into the awareness and reporting of environment, social and governance issues (ESG) in the charity sector. What does ESG mean for the charities sector?: the rise of environmental, social and governance tracked the evolution of ESG reporting in the charity sector. Reviewing the annual reports and websites of 114 charities across England, Wales, Scotland and Northern Ireland, the research found that: of the information reviewed, no charities are currently specifically reporting on ESG on their websites or in their annual reports; however, nearly a quarter (23%) did report some activities that would fall under the ESG umbrella but were not labelled as such. It is noted that charity boards are reporting ESG matters but as discrete parts of good governance rather than considering them holistically.

As charities in different countries are required to meet some form of charity or public benefit test, trustees should already be thinking about how their organisations can demonstrate the public benefit they provide and how best to report that impact. So, it might be argued that social purpose entities, including charities, have been thinking about ESG for a lot longer than other sectors and the whole movement is something that is hard-wired into charities.

However, the duty on trustees to use charitable resources only for achieving and supporting the fulfilment of charitable purposes has created some confusion as to whether a charity that does not have environmental conservation as its charitable object can undertake actions to tackle climate change. The further duties of trustees to act with care and prudence and to act independently and in the best interests of the charitable purposes, putting aside personal motives or prejudices, when making investment and other decisions can lead some trustees to think that they should not be considering ESG in their board activities. At the same time, there is a perception that the public expect charities to be held to a higher standard than other types of organisations and that charities should be seen to be behaving in a manner consistent with the values they espouse. That will include the way the charity goes about its business, they way it treats its stakeholders and suppliers, consideration about any negative impact they are having on people and planet and demonstrating their ethical standards.

For some, these considerations will be part of what they understand good governance to be.

• Demonstrating to a broad range of stakeholders the value and impact the charity has created
• Attracting and retaining talent to deliver high-quality and impactful services and activities that help the charity achieve its charitable purposes
• Seeking out efficiencies and adopting practices to improve operational effectiveness over the short, medium and long term
• Understanding stakeholder interests and how they can help the charity achieve its aims
• Reporting on and being held to account for the efficient, ethical and appropriate decisions made by the board to deliver the charitable purposes.

It could be argued that ESG is simply good governance, rebranded and adopted in the commercial sector to address negative perceptions of modern capitalism, but now being re-purposed for a sector that already has social purpose written through it like the letters in a stick of rock.

But ESG does present opportunities and challenges for charities. ESG reporting frameworks were designed for investment and financial sustainability decisions in the corporate world, therefore they are not always going to apply in the same way to charities. The opportunity for the sector is to develop a reporting framework that better suits the diversity of the sector and acknowledges the different social purposes that drive a charity’s ongoing existence. As part of that challenge some charities have adopted the UN’s Sustainable Development Goals to help guide their ESG reporting. The SDG Charter is aimed at producing tools and partnerships for all sectors to help report on their work in supporting the achievement of those goals.

ESG is not merely part of the risk register, with an ever-growing waistband of discomfort, despite the fact that many of the aspects of ESG carry an easily identifiable reputational or operational risk. ESG should also not just be seen as part of a growing list of requirements on which large organisations must report: net zero 2050 commitments; modern slavery statements; gender pay gap reports; and CO₂ measurements, for example.

Fundamentally, ESG provides a range of opportunities for charities to demonstrate their values, culture and ethics and reinforce their legitimacy as a global citizen trying to leave the world in a better condition than that in which they found it. What charity wouldn’t want to be part of that conversation?

Join us for our ESG Summit on Friday 22 April at etc Venues St Pauls, London. We have a day packed full of presentations, debates and networking.

Louise Thomson FCG, Head of Policy (NFP), CGIUKI