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.
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.
Looking at the benefits of integrating ESG for NPOs makes it clear why it has to be a priority:
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.
The process of integrating ESG is complex and multifaceted. Yet, none of the challenges that NPOs will probably face are unsurmountable.
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.
