ESG considerations

Environmental, Social and Governance (ESG) considerations have become a hot topic in recent years – particularly in the NFP sector. Encouragingly, the survey overwhelmingly points to the driver of this ESG focus being for organisations to ensure their investment approach aligns with its mission. However, respondents also said personal beliefs of those on the Board or relevant Committees were influencing the ESG approach, potentially pointing to some weaknesses in governance in this area.

Incorporating ESG considerations into investments is important to respondents, but ranks below managing risk and generating returns. This suggests organisations are aware of responsible investing, however some do not have the appetite to prioritise it, as they believe there is a trade-off with financial outcomes.

As NFPs operate at the coal face of societal needs and occupy an altruistic position in the community, it might be assumed that a wide range of ESG considerations are embedded in the management of NFP capital. However, the question remains, should a NFP have this expectation placed on them, or should the ESG approach be one that naturally aligns with their organisation’s mission and purpose? For example, it would be expected that a NFP providing support for gambling addiction would avoid gaming investments. However, should it also be obliged to avoid investments in fossil fuels? There is a danger that the inclusion of such a restriction would more likely be reflective of the Board or Committees’ personal beliefs and preference. This seems to be supported with the survey showing 11% of respondents felt personal beliefs play a role when formulating ESG policy for an organisation. Another popular response for factors driving ESG considerations in NFPs included ‘to meet donor and community expectations.’ It is likely that donors may become increasingly sensitive to how their contributions are being managed. Therefore, NFPs may benefit from the increasing focus on ESG through additional donations and sponsorships, particularly from corporate and larger sophisticated donors. The challenge for NFPs will be to utilise transparency and promote their ESG approach to all stakeholders. More broadly, Boards or Committees which focus on ESG investment considerations to ‘fulfil governance expectations’ and ‘to reduce potential reputational risk’ indicate a sound governance approach and awareness of the importance of managing this, at times, emotive area.

Top ranking considerations driving ESG strategies for investing in the NFP sector:

44%

Ensuring the investment approach aligns with the organisation’s mission

20%

To meet donor and community expectations 14% other 11%

The personal beliefs of those on the Board or relevant Committees

11%

Reduce potential for reputational risk

What this means for you:

When considering ESG strategies and practices for investments, NFPs should:

Have a sound Investment Policy Statement (IPS) – ensure that your ESG approach is workshopped and clearly documented in the organisation’s IPS. Invest in education – the ESG landscape is evolving, therefore keeping those in relevant roles and the associated policy up to date, requires ongoing education and regular policy review. Make time for self-reflection – the individuals on Boards and subcommittees should regularly reflect on their approach, ensuring their personal beliefs do not cloud their views when acting for the NFP. Implement proactive PR/communications management – ESG is an emotive topic, so effective communication to stakeholders is critical.