Why the not-for-profit sector can’t be on the sidelines of ESG adoption

June 26, 2022 BDO CANADA

As competition for funding within the not-for-profit sector grows, innovative approaches to making an impact and sustaining growth must be at the forefront of every leader's agenda.

One clear way to drive value is by ingraining environmental, social, and governance (ESG) principles deeper into your strategy and operational ethos.

To date, the majority of ESG conversations have focused on for-profit businesses, but with the world becoming more focused on sustainability, ESG integration is no longer a nice-to-have, but a strategic imperative to do good, improve overall performance, and enhance the promise for the future.

What is ESG?

ESG refers to a three-pronged set of principles that should guide decision-making and improve social responsibility in organizations. The three components are often defined in the following ways:

ESG Table
Environmental Social Governance
  • Climate strategy
  • Environmental management
  • Resource management
  • Energy management
  • Water risks and impact
  • Diversity and inclusion
  • Health and safety
  • Human rights
  • Social impact of the product portfolio
  • Impact on local communities
  • Ethics and compliance
  • Anti-corruption
  • Bribery
  • Board independence
  • Supply chain management
  • Compensation
  • Whistle-blower schemes
  • Lobbying
  • Taxes

Although climate is often categorized as an environmental issue, its impact is much broader. In the World Bank's report on the social dimensions of climate change, the organization identifies climate as being deeply intertwined with global patterns of inequality. It has found that the most vulnerable face disproportionate challenges in terms of extreme events, health effects, food security, livelihood security, water security, and cultural identity.

4 reasons ESG should matter to NPOs

Regardless of organizational structure, life cycle stage, or revenue model, growth requires an effective ESG strategy. Measuring performance today and creating a solid plan for tomorrow can help your NPO in four ways:

1. Attracting new donors

Success hinges on an organization's ability to be progressive in its mission, adapt to the evolving needs of its stakeholders, and be fearlessly innovative in growing its operational programming.

Stakeholder expectations are rapidly changing, as donors, staff, and volunteers embrace ESG considerations as part of their core values. If NPOs want to persuade philanthropists that they are a reliable vehicle for their donations, an effective ESG program is not just an asset, but a badge of credibility and integrity.

2. Talent acquisition and employee retention

The NPO sector in Canada is a bedrock of the country's economy, both for the impact it has on communities and for employing more than 2.5 million Canadians. Yet, this sector has not been immune to the “Great Resignation” and faces similar challenges of attracting, retaining, and growing top talent as the private sector.

Staff and volunteers alike prioritize working with leading organizations that recognize how integral thoughtful ESG programs are to maintaining and creating sustainable organizational performance.

Millennials and Gen Z, who will soon comprise three-quarters of the workforce, want to work for an organization that understands, values, and strives for better outcomes—not just as part of its cause, but through a comprehensive, transparent, and accountable ESG strategy.

3. Brand and reputation uplift

According to GlobalData's Market Pulse Consumer Survey 2020, customers are more likely to pay a premium for sustainability-aligned causes, and 81% would pay more for products supporting environmental protection.

Just as consumers prioritize ESG in their purchasing decisions, donors are increasingly interested in how an organization operates over the more traditional details of what they do. By being an early adopter of ESG strategies, NPOs can stand out and gain positive recognition for their sustainability commitments.

We have seen an example of this in higher education, where a growing emphasis on sustainability is demonstrated by the formation of the Association for the Advancement of Sustainability in Higher Education (AASHE). Over 1,080 institutions registered to use AASHE's Sustainability Tracking, Assessment and Rating System to self-report their sustainability performance, a clear sign that universities and colleges view such transparency as a differentiator in how they market themselves to prospective students and donors.

4. Alignment with leading industry peers

Board members can bring ESG experience and perspectives from their corporate roles to their NPO board table. To leverage these skills, director profiles in board recruitment efforts are changing as nominating committees tactically search for members whose experience extends beyond mainstream governance to include leadership related to climate and social issues.

With ESG matters gaining momentum on the corporate side, board members are increasingly attuned to the reputational risks of being associated with a non-reporting organization.

As Miranda Hubbs, Corporate Director and Vice Chair of the Canadian Red Cross, explains, “The board needs an ESG mindset, meaning both experienced and newly appointed board members have a clear recognition of the importance of ESG, a significant curiosity, and a strong commitment and appetite for learning.”

Rather than competencies residing with one or two board members, Hubbs says this implies a baseline level of competence for the entire board and a willingness to bring in experts and additional perspectives to have meaningful discussions.

How BDO can help

Our team can help you identify opportunities for ESG-driven innovation and build a plan to map the qualitative and quantitative changes necessary to position your organization as an industry leader in ESG.

To kickstart or enhance your sustainability journey, reach out to our ESG and NPO leaders:

Kelly Hagen, Partner, National Not-For-Profit & Education Leader
Steph Fox, Vice-President of Sustainability, Sub-Sector Lead for Charities and Foundations

This article is part of a series designed to help NPOs tackle their most pressing challenges and foresee capitalize on areas of opportunities to drive future growth. Get more insights in our article, 6 initiatives not-for-profits should focus on to thrive in an evolving world.

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