What is ESG?
ESG stands for Environmental, Social, and Governance. It’s a wide-ranging term, which covers the targets your organisation sets, and the actions it takes, to demonstrate your concern for wider societal impact. ESG includes everything from the environmental sustainability of your office to your equality, diversity and inclusion policies.
In the corporate world, ESG has become a well-established concept. Many for-profit companies have increasingly visible ESG policies and public reporting in an effort to demonstrate their credentials to current and prospective employees, investors, and stakeholders. However, recent reports suggest charities have been slower in the uptake of ESG reporting. A survey by finance firm RSM of 114 UK charities found that none had ESG sections on their website or in their annual report, and less than one in four included ESG-related content in their accounts.
Why should charities embrace ESG reporting?
As the public demonstrates a greater awareness and concern about the environmental impact of organisations and their attitude towards social equality, charities may find that supporters, volunteers and donors are starting to look for ESG information when deciding what cause to support. In the finance sector, for example, an ESG-focus has been shown to have a demonstrable positive impact (beyond the ESG factors themselves), with the financial press reporting that many ESG funds out-perform other conventional types of funds. As awareness of ESG reporting grows, charities that pro-actively publish the steps they are taking may find themselves at an advantage, for example, when trying to attract corporate partners or sponsors.
Challenges
ESG may be embedded as a term in corporate culture, but it is still largely unregulated. Some organisations will have statutory obligations to report on ESG-related matters – e.g. gender pay gap reports, greenhouse gas emissions reporting, publishing modern slavery statements – but, in the most part, ESG reporting is voluntary and can be inconsistent.
Added to this is the challenge that environmental issues such as biodiversity are difficult to quantify and social factors are notoriously complex to standardise. This makes it difficult to assess and compare progress on ESG issues. Charities that embrace ESG reporting need to ensure that noble targets and statements are backed-up by measurable actions. An impressive ESG statement that has nothing sitting behind it could expose your charity to allegations of ‘woke washing’, ‘green washing’ or unethical behaviour.
Charities also need to ensure that ESG matters do not distract or detract from the advancement of their charitable purposes. In a time of ‘culture wars’, the pursuit by some charities as what is seen as a ‘woke’ agenda has led to damaging media coverage and challenges from MPs and the Charity Commission. A trustee’s main legal duty must always be to advance their charity’s objects, so the pursuit of ESG policies and reporting must be properly considered and trustee boards should be ready to explain how the charity’s work on ESG issues is helping to progress those objects.
What should charities do?
Many charities will already have ESG targets and strategies in place, even if they’re not currently using the term to describe those activities. For example, we know lots of charities have been developing equality, diversity, and inclusion strategies in recent years and some charities will be delivering ESG benefits as part of their primary purpose activities.
Embracing ESG reporting doesn’t necessarily require a lot of money or resource. As a starting point, it may be useful to set up an internal working group to review what is already being done in your charity and to devise a strategy for development. The working group should identify where improvements need to be made and which areas may need more attention than others. Once you have a strategy, make it public and update it regularly as you work towards your targets.
We’ve been working with several charity clients to brainstorm and develop strategies in the ESG arena, to draft policies and procedures, and to review reports. Please do get in touch if you’d like to discuss this further.