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ESG Is Important For Nonprofit Boards To Consider As They Improve Governance Practices

ESG and Nonprofit Boards

ESG, or environmental, social, and governance, is an issue that’s making big waves, and ESG for nonprofits is getting its share of attention as well. Society’s emphasis on preserving the environment is having an impact on virtually all types of organizations including corporations, unions, governmental bodies, and nonprofit organizations.

Why should that matter to your nonprofit? Your nonprofit may have investors in addition to donors and members, and they may hold ESG for nonprofits in very high regard. That means you should too.

Companies that employed past generations didn’t give much thought to environmental concerns, but that’s not the case today. In today’s business world, the millennial generation and beyond are seeking jobs at the top companies. One of the things they’re looking for in their careers is whether companies are sustainable and green-friendly. Top companies know that having a commitment to sustainable, ethical business practices will help them attract top talent and it makes investors happy too.

The competition for nonprofit funding is highly competitive, and incorporating ESG practices into your nonprofit can make the difference between attracting investors or getting passed over.

What Is ESG?

ESG is a marketplace term that refers to a set of standards that reflects an organization’s criteria for being ethical and socially conscious about the environment. To put it another way, ESG sets the standard on how well organizations act as stewards of nature and its resources. Organizations demonstrate their commitment to ESG for nonprofits, in part, by how they manage relationships with employees, vendors, and others. The governance portion of ESG has to do with how ethically organizations govern themselves.

In many ways, ESG has become the new measure of success for organizations. Black Rock CEO Larry Fink predicts that all investors will give strong consideration to ESG in valuing companies. Fink that companies must not only deliver a strong financial performance but also make a positive contribution to society in order to prosper over time.

The History of ESG and Nonprofits

The first socially responsible strategies rose during the 1950s and 1960s. Most of them focused on health facilities and affordable housing. In the 1970s, shareholders protested against apartheid in South Africa by withdrawing their equity from companies in that country. Shortly after, activist investors followed suit and used the same strategy to advance other important causes.

The term ESG was first popularized by the World Bank Group’s International Finance Corporation when they published a report called Who Cares Wins in 2004.  The report determined that companies that created ESG policies would be stronger and more resilient. In 2005, the United Nations reinforced ESG when it established an initiative called the Principles for Responsible Investment. Over time, major corporations started to accept the triple bottom line standard which means accounting for financial, social, and environmental results.

Today, some companies treat ESG in three pillars, and others combine them into one for rating purposes.

Why Should ESG Matter to Nonprofit Boards?

Grants and donations are obviously a major part of nonprofit work. Nonprofits also sometimes benefit from funds from investors. Nonprofit investing works differently than standard donations. Some investors give to nonprofit organizations with an expectation that they’ll get a return on their investment. It’s common for investors to make large financial commitments for a few years with the hope of helping nonprofits be successful over the long term.

According to a poll as part of the Institutional Investors Sustainable Investing Survey 2018, one in eight organizations hadn’t yet delved into sustainable investing strategies, but they planned to in 2019. That figure accounts for 38% of companies that were investing in ESG. The survey included 105 organizations of which 75 were nonprofits.

Of the organizations that were polled, 69% said that the driving factor to consider investing in ESG was to bring themselves into closer alignment with their mission. Other reasons for investing in ESG were:

  • Having greater Social impact
  • Improving reputation
  • Getting a financial return
  • Having increased access to a broader range of products and services
  • It was a priority of the investment committee or the investment policy required it
  • Donors demanded it

What Are the ESG Trends for Nonprofit Boards?

A recent survey shows that smaller foundations (those with less than $100 million in assets) are more likely to use ESG funds as compared with larger organizations. The most common reasons they cited were aligning with their mission and broad ESG mandates.

James Stenstrom and Eric Bailey, financial advisors from Captrust, stated that it’s surprising to see smaller nonprofit organizations leading the way in terms of ESG matters because it’s usually the larger organizations that lead the way on major issues and innovations. Stenstrom and Bailey stated that it can be difficult to get a nonprofit board of directors and an investment committee on the same page with a view on environmental stewardship and social responsibility because there are many diverse opinions on how to define it. In spite of this, many companies continue to include ESG in CEO performance evaluations.

Nonprofit organizations follow many of the same trends as corporations and that means that nonprofit boards should also give significance to ESG principles by making them part of their culture and mission.

How Nonprofits Can Incorporate ESG Principles

If your nonprofit board has yet to factor ESG principles into the fabric of your organization, it’s time to put it onto your agenda and start having discussions about it. Start the discussion by talking about how ESG relates to the work you’re doing. Consider how ESG relates to your mission and vision and what changes you might be able to make to emphasize the connection between them. A board management system like BoardEffect offers the most secure way to work on ESG issues.

Next, open up the discussion about ESG with your investors, employees, and members. Make a point to incorporate ESG goals and metrics into your strategic planning efforts. Make plans to weave ESG principles into your nonprofit’s story so you can share it easily with others during your fundraising efforts.

Embracing ESG is more than a matter of ethics and morals. Investors and donors are sure to take notice of your efforts to promote ESG principles because they consider it to be part of good business practices that lead to profitability.

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