ESG Investing: Everything Nonprofits Need to Know

Nonprofits tend to follow many of the same governance practices as for-profit corporations. That makes perfect sense since nonprofit boards have just as much responsibility and liability as corporate boards. There’s been a heavier focus in the investment world on companies that favor ESG (environmental, social, and governance) initiatives. It stands to reason that nonprofits should also take ESG into consideration when it comes to investing.

To help your board understand ESG investing, we’re highlighting the recent ESG trends for nonprofits. We’ll also help your board bring the issue of ESG investing into focus and review ways to implement ESG practices.

Bringing ESG into Focus for Nonprofits

Emerging trends show that several things play a role in ESG investing for nonprofits including their size, approaches, and how their boards view the issue of ESG.

The ESG Investor Sentiment Study by Allianz showed that smaller organizations (those with less than $100 million in assets) are more likely to use ESG investing than larger organizations. It’s possible to attribute this to the fact that smaller organizations have smaller boards and investment committees which makes decision-making faster and easier. By contrast, larger organizations are apt to have larger, more diverse boards, making it difficult for the board to reach a consensus on ESG investing.

The study also showed that the most common approaches to ESG investing were mission-aligned investing and broad ESG mandates.

As for the implementation of ESG investing initiatives, negative screening is much more common for nonprofits than positive identification.

Perhaps the biggest issue with ESG for nonprofit boards is drilling down a consensus on how to define it. Individual board members don’t always agree on how they view ESG investing. Without an agreement on how to define ESG, it’s impossible to form a plan for wise investing.

For national nonprofits, ESG investing is even more complicated. ESG causes vary around the country based on the climate, economy, society, and environment. What’s important in one area is nonexistent in another.

Before getting into some strategies for implementing ESG investing, let’s look at some of the recent trends in ESG for nonprofit organizations.

ESG Trends for Nonprofits

We can get a glimpse of the trends in ESG investing for nonprofits by looking at statistics from Captrust’s second annual Endowments and Foundations Survey. Captrust surveyed over 130 organizations (64% private and 36% public) that have a focus on religious, educational, and charitable missions.

Here’s what they learned:

• About 70% of organizations don’t currently leverage ESG themes.
• Smaller organizations lead the way in ESG investing.
• Only 2% of the respondents said they planned to reduce their allocation to ESG funds.
• About half of nonprofits were undecided about ESG funds.
• Just over a third of the respondents said they planned to maintain their current ESG investments and another 9% had plans to increase the allocation to their funds.

How Your Board Can Implement 6 ESG Practices

While your board works on a common definition of ESG and what role it plays within your organization, we’ve got 6 ESG practices for your board to consider.

1. Exclusionary screening. This is the oldest and simplest way to approach ESG. Nonprofit boards may choose to exclude companies they invest in based on their core business activities. With this type of approach, it’s possible to exclude whole sects of industries—for example, gambling establishments, alcohol companies, or tobacco companies.

Nonprofit boards have to be careful about the choices they make in ESG investing. In considering to exclude a particular industry, they could be alienating other companies that are associated with that industry. It’s also common for nonprofit boards to feel pressure from various stakeholders to support or exclude certain companies or industries.

2. Best-in-class selection. This practice is also known as positive selection or positive alignment. What this means is that nonprofits choose companies that have good ESG track records as compared with other companies. There are indices available to help your board measure ESG parameters and they’re useful in board discussions. Index rankings allow your board to compare companies against their sector and peers within the industry. Your board might consider developing a portfolio that weighs more heavily toward companies that have good ESG rankings, as there is less inherent risk involved than with exclusionary screening.

3. ESG integration. This approach doesn’t require you to compare or rank companies based on ESG scores. It’s a hands-on approach that takes ESG into consideration when evaluating individual investments. The downside of this approach is that it requires a variety of resources and a degree of financial expertise.

4. Thematic investing. With this approach, boards decide to invest only in companies that focus on specific ESG initiatives such as health care, green practices, or renewable energy.

5. Impact investing. Boards that take this approach select investments that are designed with specific outcomes for ESG in mind that will also achieve a good return. This type of approach requires resources to actively measure and report the impacts of ESG issues. A problem with this type of investing is that it’s challenging for companies to net high returns with companies that serve a social cause.

6. Active ownership. This the most hands-on approach to ESG investing. It’s also the most time-consuming approach because it requires a board member to participate as a vocal shareholder or an investor would. The negative to this type of strategy is that it can strap your resources and tie up capital.

Hopefully, we’ve helped solve some of the mystery around ESG investing for nonprofits. Financial responsibility is just one of the many important duties that your board has. Your donors and stakeholders generally assess your board’s ability to make wise investments to ensure the sustainability of your nonprofit, so that adds another dimension. Donors and stakeholders also consider whether your board is well organized before they make a donation. With BoardEffect, you get all the tools to run your board effectively, including the ability to create online board books, share messages and files securely, record meeting minutes, created shared calendars, and much more. A BoardEffect board management system is an investment in your board’s future.