Environmental, Social and Governance (ESG) strategies and practices have become important aspects for Not-For-Profits (NFPs). The three ESG pillars are not only essential in risk management but have also been seen as emerging considerations for growth and opportunities.
The three pillars of ESG are:
“E” - the Environmental aspects. This refers to the NFP’s environmental impact and environmental stewardship.
“S” - the Social aspects. This refers to how the NFP manages relationships with, and creates value for, stakeholders - including the interaction with its employees, beneficiaries, and the community.
“G” - the Governance aspects. This refers to the governance dimension on the NFP’s leadership and structure, including the management practices, policies, as well as internal controls.
Many NFPs have helped drive the ESG related causes, acting as both watchdog groups and advocates. Some have benefitted from ESG as recipients of grant funds and sponsorships. Yet, many NFPs have been also slow to embrace the policies and practices of ESG in a holistic manner in their own risk management and reporting.
An environmental NFP, for example, will likely excel in the “E” part of the ESG strategy. But, they may not necessarily implement robust risk management practices and metrics across the social and governance aspects. This may include the measures taken to make sure the operations comply with the wage standard, privacy law, as well as the Anti-Bribery and Corruption guidelines, the use of contractors and vendors from a diversity perspective, and the implementation of internal controls.
Each of the environmental, social and governance spheres has its own distinct risks and opportunities. Once these risks and opportunities have been identified, they can be monitored and addressed to provide solutions for the NFPs challenges, tap the NFPs needs and realise the NFPs potentials.
ESG risks refer to aspects attributable to environmental, social and governance issues that have an impact on the current and future performance of the NFPs. This includes the relationships and trusts with donors and stakeholders; funding channels and financial performance; compliance status; operations; as well as reputation.
Risk factors to be considered under each ESG pillar are outlined below:
Environmental risks: This may take the form of physical risk, transition risk or liability risk. Physical risk arises from the physical effects of climate change and environmental degradation. Transition risk refers to the uncertainty caused by legislation, policy and societal changes to reduce the impact of climate change. Liability risk is the potential for losses due to litigation because of negative environmental impact caused by the NFPs.
Social risks: The risk factors under this category include work-health-and-safety (WHS); human rights (modern slavery and compliance to the labour law policies); diversity and inclusion; employee wellbeing; as well as community engagement. Social factors are difficult to quantify, but their significance will intensify in years to come, so it is recommended for NFPs to plan for them.
Governance risks: Like social risks, governance is difficult to quantify, but the reputational impact can be significant. For NFPs, extra attention should be provided to these risks, particularly when there are symptoms of poor codes of conduct, lack of anti-money laundering procedures, or deficient ethical standards across the operations.
With so many new developments and related potential pitfalls surrounding ESG issues, NFPs are understandably focused on minimising the risks. But alongside those risks lie commensurate ESG opportunities, ripe for development for NFPs with a clear understanding of their ESG position.
Because ESG is such a fast-moving developing concept, being mindful of newly emerging priorities, concerns, and expectations among different stakeholders; and how these priorities map back to the purpose of the NFP are important. This will enable the NFP to articulate its ESG policy and place itself in a better position to tap ESG related opportunities.
Opportunity factors that can be considered under each ESG pillar are outlined below:
Environmental opportunities: Environmental opportunities for NFPs mainly points to environmentally friendly practices in the NFP operations, such as: energy saving activities, waste management, water usage efficiency, as well as the reduction of the NFP’s carbon footprints. Green funding and green investment are also opening new opportunities for NFPs who are working on the environmental matters.
Social opportunities: Social opportunities for NFPs include the areas of developing human capital, enhancement in work-health-and-safety (WHS), diversity and inclusion, employee wellbeing, and community engagement. NFPs which focus on certain social issues may also want to explore ESG funding channels such as social bond or impact investment.
Governance opportunities: Good governance is a key factor for the success of an NFP because it encourages ethical and effective action across the management and operations. Opportunity factors to be considered include the establishment of code of conduct, compliance with the NFP regulations where it operates, internal controls implementation, as well as the NFP’s policies and procedures.
Embedding ESG risks and opportunities into the NFP
Because not every ESG factor will be material to all NFPs, it is essential for each NFP management and stakeholders to be able to identify and manage those that are. That said, what is financially and operationally material will change over time. As such, NFPs are required to understand what ESG matters become material from time to time and to adapt to these changes.
After identifying what ESG factors are material, NFPs can then build the strategy and roadmap for ESG implementation. This usually starts by setting ESG targets and KPIs. In the “what gets measured gets done” fashion, it is important to set the targets and KPIs in a holistic manner, considering key data points and involving all relevant stakeholders. This means the ESG accountability cannot sit only within one team or department in the NFP. For example, the procurement team needs to secure the sourcing of renewable energy, ethical materials, and supplier diversity, where other functions in the NFP need to work on energy reduction, waste management, and inclusive working practice within the operations.
Tracking and reporting on the ESG targets and metrics are also essential to measure the success of ESG embedment. This will help enhance trust with donors and support good governance within the NFP management practice. Many NFPs will likely not be perfect from the get-go when it comes to embedding ESG into the practice and operations. Lessons learned from tracking and reporting on ESG will help the NFP to readjust strategy, targets, and KPIs as processes transform and progress.
It is important to see ESG embedment as a transformational journey. We may start with a simple tweak of a single function, such as substituting fossil fuel energy consumption in one area to renewable energy consumption. But our ambitions can and should be greater. As the ESG transformation moves from a single function to the whole practice of the NFP, we can have bigger impacts on society and the environment; and drive new dimensions of growth.
This article was first published in the 2022 Better Boards Conference Magazine.
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