Understanding E.S.G. for charities

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Charities are no stranger to scrutiny. Donors, stakeholders, and service users alike want to know that a charity is operating in their best interests, with funds raised going directly to help a cause. They also want to know that the charity they support is behaving responsibly. 

A report from the Charity Commission found that, while public trust in the charity sector is higher than in most other parts of society, there remains a “stubbornly persistent scepticism regarding how charities use their money and how they behave”. 

This is where Environmental, Social, and Governance (ESG) reporting comes in. ESG refers to a set of standards regarding how an organisation behaves in terms of sustainability and social conscience. It covers  environmental impact, diversity and inclusion, and financial remuneration, with a particular focus on leadership. 

ESG reporting provides charities with a framework for them to discuss their sustainability policies openly. It encourages transparency and helps people investing in their mission to evaluate whether a charity is acting responsibly. In essence, ESG reporting is a crib sheet outlining how a charity operates and whether its behaviours are ethical.  

Failing to report accurately on ESG can even be a red flag for stakeholders and can mean that charities miss out on vital funds – which is particularly worrying as the cost-of-living crisis continues in the UK and charity finances remain uncertain. 

Below, we explore the benefits of having good ESG credentials, how charities can measure them, and how understanding ESG can create more fruitful partnerships with corporate organisations. 

What are the benefits of having good ESG? 

According to accounting firm RSM UK, “Charities have a head start when it comes to ESG. The fundamental purpose of a charity is to offer a public benefit and cause no harm to the environment. Both of these principles sit at the heart of ESG.” 

Reporting on ESG explicitly, and in one place, has myriad benefits for charities specifically. It can: 

• Demonstrate your values to funders 
• Support bid proposals 
• Encourage corporate organisations to partner with you
• Improve staff retention and attract new talent
• Identify opportunities to improve operational efficiency
• Address existing and future questions from stakeholders, including potential donors, regulators, service commissioners, and the media 

However, their research found that none of the 114 charities they analysed in 2022 included a section specifically on ESG on their website or in their annual report, while 23% did talk about activity that falls under the ESG umbrella, including information on anti-racism policies, the gender pay gap, and sustainability.  

It is worth noting that reporting on the gender pay gap is a legal requirement for any organisation with more than 250 employees.

How can charities measure their ESG credentials? 

Not all ESG reporting is mandatory, particularly in the charity sector. Charities need to combine what is a legal requirement with what their audiences want to know, in order to inform what they eventually report on. Research suggests that the more aligned an organisation’s ESG strategy is with what stakeholders talk about, the more highly regarded they are.  

In the corporate sector, for example, packaging company DS Smith Group started by analysing media coverage of the sector, looking at the policy landscape, and interviewing 100 of its customers “to understand the themes that resonated and in which DS Smith could have a voice”.  

Once you know what ESG means to your organisation – and the strategies you wish to focus on – you can start measuring them.  

Using an ESG framework 

There are many different ways to measure your ESG progress but a good place to start is with an ESG framework. An ESG framework is a set of guidelines that charities can measure themselves against to judge their progress as an ethical organisation.  

Here are some ESG frameworks that charities can use: 

• United Nations Global Compact: This is a set of 10 principles that organisations can incorporate into their operations. Charities can use the principles as a blueprint to work out whether their current policies are upholding them 
• The Charity Governance Code: This is not a regulatory guide but it is a great charity-specific resource that can enable and support good governance. It includes best practice advice on leadership, equality and inclusion, and organisational purpose
• Global Reporting Initiative (GRI): The GRI, founded in 1997, was set up as “a common language for organisations to report their impacts”. It provides free standards aimed at improving the “quality and consistency” of sustainability reporting, and offers helpful resources on how to use them. However, these standards have been criticised in the past for not being as consistent as the GRI suggests, with only favourable standards being followed and others easily neglected. 

Charities may already have a lot of the information they need internally – ESG reports essentially gather it all in one place for higher visibility, ensure that metrics and methodologies are explained to increase transparency, and always aim to link targets back to your charity’s purpose. 

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What is ESG investing? 

Understanding ESG is also important for charities who are looking to invest themselves, to help them partner only with conscientious organisations who represent their values while creating a sustainable source of income for their cause.  

For charities in particular, this is a win-win. Charities exist for public benefit – they need reliable streams of income to deliver their services or make grants, but they are also often in a position of moral authority. Being able to say their investments  are aligned to ESG principles can only help their cause, while trustees can continue to fulfil their duties in ensuring a return.  

Good and responsible ESG investing can: 

• Create a reliable stream of income for charities, and provide the potential to protect their reserves from longer-term inflation  
• Reflect a charity’s values 
• Encourage companies to commit to good ESG in order to secure investment
• Deliver a benefit to the wider world e.g. environmentally or socially 

In order to help charities take the lead on ESG investments, Charities Aid Foundation’s (CAF) subsidiary CFSL and its investment partners IFSL and abrdn have created a new range of funds for charitable investors with a focus on ESG factors.  

The funds, which launched in June 2022, are intended to “offer value for money whilst ensuring that investments contribute towards the long-term benefit of the causes that charities support”.  

Potential investments are screened against a set of ESG standards to ensure that the fund only holds assets  that qualify under its Responsible Investing Policy . 

Alison Taylor, Chief Executive of CAF Bank and Charity Services, writes: “This new fund range aligns with CAF’s wider purpose, to accelerate progress in society towards a fair and sustainable future for all.  

We’re also committed to designing products and services specifically for charitable organisations. Ultimately, we want to enable charities to become more resilient and sustainable for future generations.”

To find out more about ESG investing, and how to get started, sign up for our upcoming webinar by clicking here.