Non-profit organisations & ESG: more than just following a trend?

The term “ESG” is currently on everyone’s lips. ESG is no longer just a buzzword, but an expression of a changed economic culture as a result of social change, climate change and political crises. But why should non-profit organisations (NPOs) devote themselves to this topic and position themselves accordingly for the future?

What exactly does ESG stand for?

The abbreviation “ESG” stands for the English terms “Environment – Social – Governance! -in German: Environment, Social and Governance – in the context of corporate or organisational strategy.

In detail, the following aspects are covered by the respective terms:

• E stands for environmental protection aspects in the company, for example the reduction of greenhouse gas emissions and/or pollutants during production or overall energy-efficient operation, e.g. by saving electricity, etc.
• S stands for occupational health and safety aspects, diversity and social commitment, human rights and equal opportunities. The aim here is to better protect and value the people in the company.
• G describes sustainable corporate governance and corporate values – including anti-corruption, effective compliance and supervisory structures. When it comes to governance, the focus is on ensuring that companies operate lawfully and ethically.

ESG therefore refers to criteria for the sustainable management of companies in relation to environmental aspects, social aspects and integrity in corporate organisation.

In the best-case scenario, orientation towards all three ESG principles, when optimally implemented, creates sustainable, future-proof companies and business models – attractive for customers and investors: investors.

Sustainability: the expectation of non-profit organisations

The expectations of NPOs in the non-monetary area with regard to sustainability are high: the aim here is not to maximise profits, but to have as positive an impact on society as possible – depending on the topic and area of activity, usually added value in the social or environmental field.

It is not without reason that public perception of an organisation’s sustainability is particularly high. Non-profit organisations in particular should therefore address the issue in the same way as commercial enterprises, even if they do not primarily sell goods or services in order to generate profits. This is because it is no longer possible to ignore the issue of sustainability when acquiring funding in the NPO sector.

No more funding without ESG?

Fundraising is a major issue for all NPOs. Although public confidence in the charity sector is high, there is still a degree of scepticism: what are the funds being used for? Is too much money going to administration? Does the NPO itself work sustainably, i.e. does it live up to what it stands for?

Above all, donors and supporters want to be certain that a charitable organisation is absolutely focused on its purpose and is set up in such a way that funds and resources are used primarily for this purpose. Funds should directly benefit the cause, the organisation should act responsibly – money should not fizzle out in administration or disappear into dark channels. At the same time, NPOs are dependent on money from these donors and sponsors in order to be able to pursue their purpose.

This means that NPOs are not concerned with the most positive public perception possible for customer acquisition, but rather for fundraising. It is about finding and convincing donors and funders of all conceivable sizes. In future, it is precisely these donors and funders who will take a closer look at whether NPOs are working sustainably in line with ESG principles. Like investors and customers of commercial enterprises, they will increasingly base their decision to provide financial support on whether or not sustainability expectations are met.

ESG principles essential for resource procurement and beyond

For NPOs, the consideration of ESG principles can therefore be an important factor in the procurement of resources and beyond:

• Organisations that are demonstrably environmentally conscious, socially responsible and well-managed have a better chance of receiving financial support.
• ESG-compliant NPOs can stand out from the competition and attract the interest of potential donors and partners.
• By integrating ESG principles, NPOs can strengthen their mission and ensure that their internal processes and external activities are in line with their core values and are therefore convincing.

Special significance of the G in ESG for NPOs

It seems that governance is an important aspect of NPOs for all donors and funders. In the case of NPOs in particular, donors, funders and people who want to get involved attach great importance to a structure and organisation that is as efficient and transparent as possible and that is monitored effectively so that no fraud is committed with the financial resources for a good cause. For NPOs, the G is at least as important for donors and funders as it is for investors in commercial enterprises. So here, too, it is not just a question of being socially and climate-friendly – the issue of governance should be given at least the same importance.

Pioneering role, transparency and sustainability

This shows that those who integrate ESG principles will find it easier to acquire the necessary financial support to achieve their purpose. But the potential for integrating and living ESG principles in an NPO is even greater:

NPOs become pioneers of positive change. By deciding, for example, to only work with companies and conclude contracts with companies that live by ESG principles themselves, an organisation can positively communicate its own socio-political responsibility to the outside world, set a good example and inspire others to behave in the same way.

Improved transparency creates trust. If ESG indicators exist and are disclosed, this is a sign of trustworthiness and authenticity. This is particularly important as donors, sponsors and the general public increasingly expect organisations to disclose how they achieve their goals and what impact their activities have. What is already becoming commonplace in the corporate and investment sectors also makes sense here. Donors are no different from investors!

Ready for the future. Gen Z attaches great importance to doing business in line with the values of society as a whole, which ESG also stands for. Those who are prepared to work according to these principles are making themselves fit for the future and are equipped for the war of talent. NPOs also have a good chance of attracting young applicants – whether as employees or volunteers.

ESG-framework: How to integrate ESG criteria

But how can ESG principles be integrated into a non-profit organisation? The basis for this can be an ESG framework – a set of regulations and guidelines within the organisation against which the NPO “measures” itself.

Such ESG frameworks also form the basis when it comes to preparing and publishing an ESG report, even if such sustainability reporting is not legally required for NPOs – unlike in some cases for larger companies.

In order to set up such a framework, it is crucial to ask the right questions in the categories E, S and G (analysis) and then identify opportunities for action and improvement. Implementation then takes place via internal guidelines, compliance with which is regularly monitored. We are happy to support you in this process.

Conclusion

The topic of ESG is increasingly becoming an important pillar of corporate strategy – in corporations, large companies, SMEs and non-profit organisations. It comes as no surprise that NPOs are not immune to this topic: charitable foundations and associations as well as third sector companies in particular play an important role when it comes to tackling social challenges and bringing about positive change.

It therefore seems only logical for charitable foundations, associations and NPOs to make themselves fit for the future and focus on the topic of sustainability.

All-round services for NPOs

We offer a 360-degree service for your non-profit organisation: from setting it up to ongoing advice on all legal and tax matters and support with management issues.

You can find out more on the “Foundations, associations etc.” page.