By Reana Rossouw, owner and founder, Next Generation Consultants

The incorporation of environmental, social and governance (ESG) principles in corporate social investment and philanthropic programmes has been common practice for years. The same cannot be said for the nonprofit sector. To be sustainable and maintain its impact, it’s vital that the sector starts integrating ESG from strategic, operational and programmatic perspectives.

ESG represents three core factors that indicate the sustainability and ethical impact of an organisation’s operations. The environmental criteria assess the extent to which an organisation manages its environmental impact (e.g. energy or water use); the social dimension focuses on relationships for example, both internally in the organisation and externally with the community and others; and governance relates to transparency, accountability, inclusivity and ethical behaviour of the leadership. Key to the rising importance of ESG is the acknowledgement that all three elements are vital to sustainability.

Why not-for-profit organisations must integrate ESG

In practice, the nonprofit sector has largely been focused on the social or humanitarian aspect of philanthropic work. That is, after all, often at the heart of their intended impact. However, if nonprofit organisations want to continue attracting funding and sustain their operations, they have to acknowledge and understand that the environmental and governance aspects are equally important. For example, poor management of water and electricity use at a soup kitchen mitigates some of the positive social impact.

This is especially relevant in the context of climate change – and the reason why good governance is critical. NPO Boards, trustees and directors must proactively view and manage climate factors as a risk. In essence, integrating ESG into the philanthropic sector is vital to its sustainability, because in order to achieve sustainable development, the practices must be sustainable too.

Benefits of integrating ESG

Looking at the benefits of integrating ESG for NPOs makes it clear why it has to be a priority:

  • It ensures that activities and programmes are aligned with broader sustainability goals, leading to a more significant and lasting impact on society and the environment
  • It helps identify and mitigate risks, thereby building resilience.
  • ESG frameworks promote transparency and accountability, fostering trust among stakeholders.
  • can lead to more effi cient and effective operations and better resource management.
  • Donors are applying ESG criteria in their due diligence criteria, which means ESG compliance is critical to attracting funding.

    • The last point is of particular importance. Donors and social investors are the driving force of development via their power to allocate their resources where they see fit. NPOs will therefore have to adapt their funding applications to prove that they are taking ESG seriously.

    What it looks like in practice,

    For NPOs to effectively start integrating ESG into their practices, it’s vital to consider it from strategic, operational and programmatic perspectives.

    Possible challenges and solutions

    As can be seen from the table, the process of integrating ESG is complex and multifaceted. Yet, none of the challenges that NPOs will probably face are unsurmountable.

  • Limited financial and human resources: Partnerships with other organisations and companies that specialise in ESG can go a long way in accessing the necessary resources. ESG staff training is key to building in-house expertise.

  • Complexities of data collection and reporting: Start with basic metrics and expand and refine data collection processes over time. Software for ESG reporting can also be handy.

  • Regulatory and compliance requirements: Develop a compliance plan and adjust this as regulations and standards change.

  • Managing structural and cultural change: Leadership must set an example in being committed to ESG and building a culture of sustainability and ethical behaviour.

    • Case study: Why NPOs must take ESG seriously

    Listed companies or corporate social investors or large (private) foundations and trusts that allocate funding to social, socio-economic, enterprise and community development projects publish ESG reports detailing their commitments and priorities. South African NPOs that want to secure funding from these funders must pay attention to these reports.

    In ABSA’s 2022 ESG report, for example, the company details its commitment to specifi c sustainable development goals and describes its CSI objectives and activities as well as its commitment to ethical governance practices, such as anti-corruption, human rights and inclusion. To control, measure and report on identified ESG principles and proactively manage ESG risks, these principles form part of ABSA’s funding approval processes, including funding criteria. NPOs that cannot provide evidence of incorporating ESG into their strategy and operations will therefore get left behind.

    The social investment and humanitarian development sector globally recognises the importance of ESG as a criterion for partnerships and investments – NGOs that want to be sustainable must do so too.

    Reana Rossouw is the owner and founder of Next Generation Consultants, a specialist management consultancy that focuses on social investment and sustainable development, social innovation and impact management and measurement.

    This article was first published in the 2024 Inyathelo Annual Report.