The incorporation of environmental, social and governance (ESG) principles in corporate social investment and philanthropic programmes has been common practice for years. The same cannot be said for the non-profit sector. To be sustainable and maintain its impact, it’s vital that the sector starts integrating ESG from strategic, operational and programmatic perspectives.
Reana Rossouw, owner and founder of Next Generation Consultants
ESG represents three core factors that indicate the sustainability and ethical impact of an organisation’s operations. The environmental criteria assess the extent to which an organisation manages its environmental impact (eg. energy or water use); the social dimension focuses on relationships for example, both internally in the organisation and externally with the community and others; and governance relates to transparency, accountability, inclusivity and ethical behaviour of the leadership. Key to the rising importance of ESG is the acknowledgement that all three elements are vital to sustainability.
Why not-for-profit organisations must integrate ESG
In practice, the non-profit sector has largely been focused on the social or humanitarian aspect of philanthropic work. That is, after all, often at the heart of their intended impact. However, if NPOs want to continue attracting funding and sustain their operations, they have to acknowledge and understand that the environmental and governance aspects are equally important. For example, poor management of water and electricity use at a soup kitchen mitigates some of the positive social impact.
This is especially relevant in the context of climate change – and the reason why good governance is critical. NPO boards, trustees and directors must proactively view and manage climate factors as a risk. In essence, integrating ESG into the philanthropic sector is vital to its sustainability, because in order to achieve sustainable development, the practices must be sustainable too.
Benefits of integrating ESG
Looking at the benefits of integrating ESG for NPOs makes it clear why it has to be a priority:
- It ensures that activities and programmes are aligned with broader sustainability goals, leading to a more significant and lasting impact on society and the environment.
- It helps identify and mitigate risks, thereby building resilience.
- ESG frameworks promote transparency and accountability, fostering trust among stakeholders.
- It can lead to more efficient and effective operations and better resource management.
- Donors are applying ESG criteria in their due diligence criteria, which means ESG compliance is critical to attracting funding.
The last point is of particular importance. Donors and social investors are the driving force of development via their power to allocate their resources where they see fit. NPOs will therefore have to adapt their funding applications to prove that they are taking ESG seriously.
Possible challenges and solutions
The process of integrating ESG is complex and multifaceted. Yet, none of the challenges that NPOs will probably face are unsurmountable.
- Limited financial and human resources: Partnerships with other organisations and companies that specialise in ESG can go a long way in accessing the necessary resources. ESG staff training is key to building in-house expertise.
- Complexities of data collection and reporting: Start with basic metrics and expand and refine data collection processes over time. Software for ESG reporting can also be handy.
- Regulatory and compliance requirements: Develop a compliance plan and adjust this as regulations and standards change.
- Managing structural and cultural change: Leadership must set an example in being committed to ESG and building a culture of sustainability and ethical behaviour.
The social investment and humanitarian development sector globally recognises the importance of ESG as a criterion for partnerships and investments – NGOs that want to be sustainable must do so too.
