The ABCs of ESG for Charities

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5 min read

ESG has been around for a while now, with awareness increasing rapidly in the public sector and among not-for-profits in the last five years or so. Its use in the charity sector, however, is still relatively uncommon, even though the ideas behind the acronym will likely already be all too familiar for many charities.

If your charity has recently been grappling with the question of “responsible investment”, or adoption of the revised equality, diversity and inclusion principle in the Charity Governance Code, then you are working on issues encompassed by ESG, whether or not you are thinking about it through an ESG lens.

ESG includes:

  • Environmental issues, such as CO2 emissions and Net Zero, water usage and management, waste management, deforestation, pollution, and use of natural capital.
  • Social issues, such as sustainability, employee diversity and inclusion, modern slavery, social mobility, human rights at home and abroad, fair employment practices and pay, harassment and bullying, data security and privacy, and contribution to local communities.
  • Governance issues, such as board structure and diversity, ethics policies, anti-bribery and corruption, whistleblowing policies, and transparency.

Think of ESG as a grouping of non-financial performance indicators that allow a charity to, in the words of the Charity Commission, “live its values”.

Adopting an ESG centric approach is a way for a charity to be an even more responsible citizen, and to do even more of the right thing in the right way. This approach is fast becoming something that it is not simply a “nice to have” – it’s becoming key to long term sustainability.

Why should charities embrace ESG now?

Public and regulator expectations

Nobody would deny that charities already contribute to the good of society through their activities to advance their charitable purposes, for the public benefit.

The world, however, has changed considerably over the last few years, firstly with the raft of legislation and regulation predominantly relating to the environment following COP21, and then as a result of the pandemic.

Opinion has shifted in such a way that it seems generally to be recognised that no organisation can be sustainable in the long term if its activities come at too great a cost to society. It is all too clear these days that when a charity is perceived to have done the wrong thing, or to have done the right thing in the wrong way, there can be substantial reputational damage.

For several years now, the sector has been told in surveys commissioned by the Charity Commission that the general public holds charities to a higher standard than other organisations, and that charities need to “live their values”.

So, while there is no specific mention of ESG in the new charities bill, or in guidance on the Charity Commission’s website at present, the direction of travel for charities seems fairly clear.

Happily, however, charities – with their ongoing need to satisfy the public benefit test so that decisions must be made in a way which manages risks of detriment or harm to the charity’s beneficiaries or to the public in general that might otherwise result from carrying out the charity’s purpose, and their “aspirational” governance code – are already well-placed to maximise the benefits of ESG.

An opportunity, not just more risk management

The “live your values” approach advocated by the Commission has often been couched in the language of risk management for individual charities and for the sector more generally.

ESG, however, offers a different way of thinking about things. It’s not all about risk management – although risk management may be one reason for many charities to consider an ESG centric approach.

And the benefits of formally adopting an approach that embeds ESG considerations throughout your charity’s operations, as opposed to reactively dealing with individual issues as they arise, are considerable.

ESG: the benefits

Considering and reporting on ESG factors can have many benefits for charities, for example:

Employees: For most organisations, employee recruitment and retention is key, and some sectors have particular recruitment issues at the moment.

For many, particularly younger, members of the workforce, ESG is a factor to be taken into account when deciding where to work – they want to work in an organisation that aligns with their personal values. A charity which wears its ESG considerations proudly on its sleeve may be more likely to attract the talent it needs to recruit.  

Members: As for employees, it may be easier to create and maintain engagement with members if those members feel they are supporting an organisation aligned with their own personal values.

Grant funders and donors: Grant funders, such as foundations, and donors are increasingly wanting to use their power to drive change and better practices in the sector. Expect to see grant funders and donors more willing to work with and donate to charities with stronger ESG track-records.

Lenders: Funders and lenders are coming under pressure themselves from society and their stakeholders to use their power to fund activities that have a positive societal outcome.

If you’re renewing a banking facility or taking out a new one, expect to be challenged on your ESG track-record in the future. It will be part of the bank’s due diligence – are you confident your charity would meet the bank’s lending criteria?

Having a better track record on ESG is likely to enhance your ability to raise borrowing – because the better the ESG track record, the more likely it is that the lender will see you as sustainable in the longer term, and award you a better credit risk rating.

We’re also starting to see an organisation’s track record on ESG have an impact on the cost of finance, including some innovative lending structures where the coupon on the loan increases if ESG targets are not met.

Risk mitigation: Organisations that take steps to embed ESG considerations into their operations, and are able to demonstrate the factors reasonably taken into account when coming to decisions in areas that might be considered contentious – for example, in campaigning activities –should be in a much better position to mitigate the risk of litigation or regulatory involvement, as well as avoid reputational damage.

Other benefits of ESG can include:

•           Organisational growth

•           Enhanced brand / reputation

•           Reinforcement of public trust

•           Improved transparency

•           Improved risk management

•           Increased opportunities for collaboration

 

Visit our ESG page for more information about ESG at Mills and Reeve.

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