How the absence of an ESG strategy can impact the most ‘virtuous’ organizations

When we think of non-profits, especially charities, we tend to believe they are altruistic by default. We trust them because of the nature of the work they do and the social benefits they deliver to our communities.

While trust is important for every organization, it is imperative to the success of a non-profit. Without trust, funding and public support diminish. In an environment where businesses are often under scrutiny for missing the mark on communicating purpose, non-profits are just as vulnerable to missing the mark in connecting their purpose to a clear ESG strategy.

The risk of not communicating

As Argyle’s Senior Vice President Roanne Argyle, writes, there is risk in “putting the purpose ‘story’ ahead of purpose plan and actions.” And while non-profits generally lead with purpose, the public trust they enjoy is at risk when these values aren’t woven throughout their organizational structure, investments, governance or environmental considerations.

Donors’ perception of non-profits is an important driving factor in securing funding. ESG reporting not only builds trust, but also the vital capital that comes with it.

A fall from grace

In July 2020, the WE Charity scandal put all non-profits, including those who were already struggling in the pandemic, on notice. In a study from the Angus Reid Institute, 57 per cent of respondents said the WE scandal “has raised questions about governance, transparency and management that are relevant for the whole charity sector.” Donors are paying more attention to the operations of non-profits given the tax benefits rather than solely traditional programming reporting.

The trials of transparency

Charity Intelligence Canada reported in 2020 that a large proportion of charitable donations are “wasted” on large charities that lack transparency about the impact of each dollar donated. The Logic also reported that one in five of the country’s largest foundations failed to meet a minimum rate of charitable spending, also known as disbursement quotas.

The story also highlighted concerns about a lack of transparency from the Mastercard Foundation about its disbursement quota deal with the Canada Revenue Agency, “an effort by the 1,400 banks that own Mastercard to protect a clubby governance structure.” Concern about Mastercard’s disbursement privileges has contributed to the ongoing debates around increasing Canadian non-profit’s disbursement quotas.

How money is managed is crucial in creating trust, but non-profits should also explore where that money originated. As donors align their ESG strategies with their investments, non-profits need to consider whether their gift acceptance policies and practices align with their missions. In September, the chairman of Prince Charles’ charitable foundation resigned after the organization was offered a large donation from a Russian seeking citizenship, resulting in an investigation and putting the foundation’s ethical standards into question.

That is why charities should be both proud and transparent about their relationships with funders.

Investing with intention

As pressure increases on governments and businesses to align investments with positive environmental impact, non-profits need to lead by example. For example, many educational institutions, pressured by students, faculty, alumni and staff, have taken action to align their endowment funds with net-zero commitments.

The Inspirit Foundation committed to achieving a 100 per cent impact portfolio, aligning its assets with its mission for a more inclusive and pluralist country. As conversations about disbursement quotas are met with hesitation by some foundations, Inspirit has been a sector leader in granting above the quota and investing the remaining assets in companies that are top ESG performers and supporters of reconciliation.

In the UK, three charities launched the ESG ‘investing Olympics,’ inviting proposals from asset managers to invest £33.5 million, with the intent to generate combined environmental, social and financial impact. The charities leading the initiative want to send “a market signal that asset owners are demanding higher standards of Impact and ESG investment.”

Key questions for non-profits

ESG strategies can bolster an organization’s effectiveness, align its operations more closely with its vision, and earn and keep the trust of funders and society. For non-profits, here are a few key questions:

  • Environment: What is our energy use and pollution output as an organization? Can positive environmental changes be implemented within programming? Are our partners, funders and investments aligned with our environmental goals?
  • Social: How diverse is our board of directors? Does it reflect the community we serve? Do our partners and funders align with our social purpose? How often do we ask employees and volunteers for feedback on the organization and opportunities to improve the working environment?
  • Governance: Can the organization be more accountable to changes we’ve committed to? Do our gift and funding acceptance policies align with our mission? Is where we invest our funding aligned with the overarching mission of our organization? Do we have policies in place to ensure there are no conflicts of interest on our board?

By building an ESG strategy and communicating it, non-profits will have the confidence to connect their work to their broader impact — and show funders they walk the talk. At Argyle, we work with leaders in the non-profit sector to align their words with action, demonstrate accountability and earn trust.

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