In the for-profit sphere, particularly among SEC-regulated companies, environmental, social, and governance (ESG) planning mainly focuses on compliance and risk mitigation. However, nonprofits can approach ESG as an opportunity to grow their mission and impact in a rapidly changing world.
Background: ESG Standard and Reporting
Numerous global ESG frameworks and standards have emerged over the past few years, aiming to promote sustainability strategies and offer direction on sustainability reporting and disclosure. For-profit organizations often use ESG reporting to inform investment decisions, comply with regulations, and/or give them a competitive edge. At the current time, there is no universal standard in place, but frameworks and standards are consolidating. The International Sustainability Standards Board (ISSB) recently merged with the Sustainability Accounting Standards Board (SASB). The resulting organization is working with the Global Reporting Initiative (GRI), a leading framework guiding corporate ESG transparency, to establish universal metrics for reporting greenhouse gas emissions, human rights protections, diversity, equity, and inclusion (DEI) progress, and linkages to the United Nations Sustainable Development Goals.
ESG reporting is gradually becoming standard practice, even for entities that aren't bound by SEC regulations. In the corporate space, organizations typically adopt ESG reporting as a reaction to the demands of stakeholders. Nonprofits will eventually face similar demands, but they are uniquely positioned to proactively leverage ESG to enhance their mission and brand.
Evolving Expectations of Transparency
Because nonprofits address gaps in the market and serve individuals and communities where private sector or government support is insufficient, they are granted a social license to operate. This comes with the benefit of tax exemption, but in exchange, nonprofits are required to operate transparently and provide information about their activities and finances to the public. Nonprofit reporting expectations have evolved over time, with organizations now self-reporting more impact and operational data to third-party evaluators such as Charity Navigator, GuideStar, and Candid, in addition to the IRS.
Nonprofits must navigate evolving expectations from stakeholders, who prioritize both mission impact and environmental responsibility. Stakeholders expect nonprofits to understand their environmental impact and develop strategies to mitigate it. The BDO Nonprofit Benchmarking Report found that 18% of nonprofits evaluated their vendors, partners, and/or funders for ESG policies and actions. Donors are already evaluating investment portfolios for endowments that fund nonprofit programs, and foundations are increasingly aligning their endowments to ESG metrics using GIIN's IRIS+. Stakeholders also expect nonprofits to report on metrics that demonstrate progress toward diversity, equity, and inclusion.
Integrating ESG Principles
Nonprofit executives must prioritize sustainability as a key focus in all aspects of management to ensure their organization's success in the future. This includes attuning to evolving stakeholder priorities and ensuring continued access to donations and capital. By integrating ESG principles into all facets of the nonprofit lifecycle, organizations can amplify the impact of their mission and contribute to continued success.
To drive adoption throughout the organization, establishing ESG expectations at the leadership level is crucial. Program staff can seize the opportunity to further integrate ESG elements and frameworks into program design, delivery, and measurement. Development professionals can utilize ESG reporting to articulate insights that are attractive to individual, corporate, and foundation donors. Communication and marketing professionals can tell a truly holistic story of impact that highlights the organization's commitment to sustainability. Finance leaders can ensure that their investments reinforce the organization's mission and align with its ESG goals.
By approaching ESG not only as a requirement to comply with evolving reporting expectations but also as an opportunity to enhance their mission and brand, nonprofits can position themselves as leaders in the push toward a sustainable future.