ESG Is Good For Nonprofits Too
Certainly, one of the most rapid and successful movements of the past 20 years is the emergence and almost universal acceptance of Environmental, Social and Governance (ESG) strategies and practices as a way of evaluating corporations and businesses. Companies are given independent ratings, and investment decisions are increasingly driven by these results.
From corporate philanthropy to corporate social responsibility to the “triple bottom line” (introduced by a 1998 report by John Elkington of SustainAbility as financial, environmental and social factors in a company’s equity), ESG has been embraced by corporate CEOs and boards – often encouraged, if not required, by major investors, including public pension funds and private investors such as Black Rock and Blackstone. Having started as a way of enhancing a firm’s reputation, ESG has quickly risen to an accepted way of measuring a company’s financial performance as well.
Integral to ESG is the identification of relevant material issues that are important to an organization’s stakeholders, the creation of goals and targets to positively address these issues, and the public reporting on a firm’s progress toward these targets and metrics.
Nonprofit organizations have both helped to drive this innovation — acting as both watchdog groups and advocates – and benefitted from ESG as recipients of grant funds and sponsorships as companies race to align themselves with pertinent social causes and reputable partners. Yet, many nonprofits have been slow to embrace the very policies and practices that they encourage, and benefit from, in their own operations.
There may be many reasons for this lack of attention to ESG policies and practices in nonprofit organizations. It’s possible that nonprofit leaders believe that positive ESG performance will not significantly impact their trustworthiness and reputation while negative performance might quickly diminish it — so there is little incentive to engage in this kind of public targeting and reporting. Likewise, donors and investors in nonprofits often do so primarily because they believe the cause is important without stopping to consider whether the organization is effective at its work. And an organization’s own stakeholders (e.g., employees, clients, the public) may have little interest in pursuing policies and practices that they deem secondary to an organization’s mission.
On the other hand, advocates of ESG argue that environmental, social and governance issues are critical to the communities that these organizations serve and the planet where we all live and work. They also argue that that nonprofit organizations have a special need for transparency and accountability as public charities who operate with substantial tax benefits. And increasingly, donors are paying more attention to how nonprofits conduct their work rather than simply what they do in communities.
In fact, it’s likely that the current situation will not change until there is substantial pressure from donors (particularly government, foundations and corporations) for nonprofits to formalize their ESG policies and practices. Witness the growing focus on Diversity, Equity and Inclusion as important aspects of nonprofit work, driven primarily by donors such as the Ford Foundation and employees of these organizations, as well as growing government requirements for organizations to adopt policies such as those protecting whistleblowers or preventing sexual harassment.
One notable exception is higher education. Driven primarily by their students and professional associations, many colleges and universities have embraced sustainability and responsible investing, and they have published sustainability reports or participated in industry surveys about their work.
The Association for the Advancement of Sustainability in Higher Education (AASHE) boasts over 1,000 colleges and universities that are participating in its Sustainability Tracking, Assessment and Rating System (STARS) and it assigns good ratings (Platinum, Gold, Silver, Bronze) to over 600 of them.
It also has published the 2020 Sustainable Campus Index, which lists top performing schools in 17 impact areas such as Air & Climate, Buildings, Curriculum, Diversity & Affordability, Energy, Investment & Finance, Public Engagement, Purchasing, Transportation, Waste, Water and Wellbeing. Missing from this report is any mention of good governance practices or any quantitative information about these institutions’ carbon footprints or impact on the environment, but it’s a good start.
Presumably, this kind of public recognition and disclosure will encourage other colleges and universities to follow suit and publish their own sustainability or ESG reports as new methods of burnishing their reputations. This new information will likely cause students and donors to factor in these ratings when deciding which institutions to attend and support. And potential and current employees of these schools may decide that they would rather work at a place that takes sustainability and ESG practices seriously. The result will be an impact (either positive or negative) on the financial viability of these institutions.
It is time that other types of nonprofit organizations and their stakeholders think about embracing ESG strategies, targets and reporting as new ways of managing their reputations and enhancing their attractiveness to donors and partners. Their institutions — and the communities they serve — will benefit from the change.