ESG for Nonprofits: What Your Group Needs to Know

Does your board stand up and notice when a new concept catches on like wildfire? That’s exactly what happened with environmental, social, and governance (ESG), a movement that’s been swift and thriving across all organizations.

ESG principles emerged over the last two decades. These principles caught on quickly with corporations, and nonprofits soon followed suit.

In the beginning, corporate and nonprofit leaders viewed ESG as a tool to enhance their organizations’ reputations among stakeholders. That philosophy has since evolved to where ESG is also a way to measure an organization’s financial performance.

Many nonprofits have been hesitant to get fully on board with ESG, favoring encouraging these principles without palpably implementing them.

We’ll explain why your board needs to know ESG is such a critical component to the viability of your nonprofit, what you have to learn from the nonprofit ESG frontrunners, and how to set up a responsible framework for ESG investing.

How to Begin the Conversation Around ESG

ESG is multi-faceted, making it difficult for board members to know where to start the conversation. Before you put the issue on your next board meeting agenda, have you taken the pulse of your board related to ESG?

You may find two perspectives on ESG – all-in board members and those who are reticent. Some board members may believe that developing a culture of ESG won’t materially impact your nonprofit’s trustworthiness and reputation. Further, they may believe if your ESG initiatives aren’t up to snuff, your nonprofit will lose ground with donors and stakeholders rather than gain it. Some board members may point out that donors and investors are more focused on your nonprofit’s cause as opposed to whether you’re getting good results. You may also face objections from board members who don’t believe ESG is significant to the nonprofit’s mission.

Those who understand the role of ESG know that it’s critical to the communities they serve. The reality is today’s donors and stakeholders are not only interested in what nonprofits are doing, but they’re also interested in how they’re doing it and whether the group’s activities are producing impactful results.

With those things in mind, where do you begin? An excellent place to start is throwing out a few questions to your board for discussion.

Here are a few suggestions of questions that will get a lively discussion rolling:

• What material issues do our stakeholders view as relevant?
• How can we create goals and targets and incorporate them into our strategic planning process?
• How will we publicly report on our ESG initiatives and progress?
• What resources can we access to inform us about ESG investing?

What Is “the Why” Behind ESG for Nonprofits?

As observers, or even advocates of ESG, some nonprofits have helped drive ESG principles forward. While ESG is a noteworthy characteristic of your vendors and stakeholders, they view your nonprofit in much the same way.

ESG provides a way to express your institutional values. Your employees, volunteers, donors, and stakeholders take notice of the companies you favor and those you don’t, especially in the area of investing.

A focus on ESG can help your nonprofit avoid long-term investment risks that could be associated with climate change concerns. Your nonprofit’s fidelity to ESG will also demonstrate your commitment to diversity, equity, and inclusion. For many donors, ESG matters a lot. Several national grants are only awarded to nonprofits that invest in ESG funds.

How Are the ESG Frontrunners faring in the Nonprofit Space?

Higher education takes the lead in ESG as students and professional associations are increasingly embracing ESG principles and investing funds accordingly. Many colleges and universities are now publishing sustainability reports.

According to the Association for the Advancement of Sustainability in Higher Education, over 1,000 colleges and universities participate in the Sustainability Tracking, Assessment and Rating System (STARS), ranking on ESG according to a star-rating scale. The association also published an index that lists the top-performing schools in the following areas:

• Air & climate
• Buildings
• Diversity & affordability
• Curriculum
• Campus engagement
• Grounds
• Investment & finance
• Public engagement
• Research
• Energy
• Investment & finance
• Purchasing
• Public engagement
• Transportation
• Waste
• Water
• Well-being

The ESG frontrunners in higher education are receiving public recognition, which should motivate other colleges and universities to follow suit.

Moreover, ESG is a significant factor for students and employees. Many students are accounting for a school’s commitment to ESG as they make their final choices for where to attend school. The same goes for potential employees who have preferences about working for companies and nonprofits that promote an ESG culture.

Overall, ESG impacts the financial viability of colleges and universities, and ESG has the same positive impact on all other nonprofits.

Building an ESG Framework for Sustainable Investing

To smooth out the path for starting discussions around building an ESG framework for sustainable investing, you may want to start by asking questions about the focus of your investments.

We’re listing a few good questions to get the discussions rolling at your next board meeting:

• What is the range and depth of our sustainable investing focus?
• Which issues most closely resonate with our nonprofit? (social justice, diversity, human rights, healthy communities, environmental sustainability, etc.)
• Will we take a narrow or broad focus on sustainable investing?
• Should we align with an existing framework such as Sustainable Development Goals or Principles of Responsible Investment?
• How can we break down our investments by asset class?
• How much of our reserves will we dedicate to ESG?

The answers to these and other questions will lead you to your next steps.

Is it time for your nonprofit to make a more significant commitment to ESG? The current trend indicates ESG provides a good way for nonprofits to manage their reputations and gain traction with donors and partners. With every step your nonprofit takes forward with ESG, your organization and the communities it serves will significantly benefit from your initiative.

Your board management solution by BoardEffect enables your board to collaborate securely about ESG and all other board matters.