Why Transparency on ESG Matters for Nonprofits

Donors, volunteers, and partners support nonprofits because of their missions. They want to help nonprofits achieve their goals, whether those goals are creating a community feeding program, raising money for scholarships, or cleaning up a local waterway.

A growing number of people are deciding where to put their time, money and energy based not only on the goals of a nonprofit, but also its commitment to environmental sustainability, leadership, employee diversity and other social responsibility issues. They want to know details about these efforts, even if they don’t seem tied to the nonprofit’s stated mission.

Prompted by investors, consumers, and in some cases regulators, many organizations have created a set of ESG (environmental, social and governance) standards and goals. They measure and publicly report their progress on these goals.

Nonprofit leaders understand the critical importance of providing detailed information about how they meet the goals of their mission. However, they don’t necessarily have the experience or technical skills to track and report the ways their organization is setting and working toward ESG goals and commitments.

Also, leaders may not yet see the importance of ESG reporting. They see their mission reporting as the primary way they communicate their worth and effectiveness to the public. However, as noted in a Forbes article, “increasingly, donors are paying more attention to how nonprofits conduct their work rather than simply what they do in communities.”

The Opportunity for Nonprofits

ESG reporting offers an opportunity for nonprofits to show that their organizations are committed to their mission and to the overall betterment of society. Setting ESG standards for operations is a natural fit for nonprofits in light of their missions.

Reporting to donors, volunteers and vendors is also a way to improve your reputation and earn trust. Doing so will improve the working conditions at your organization, paving the way for better job satisfaction among current employees and attracting future employees.

The nonprofit board and leadership can set the tone for the organization by requiring ESG data to be collected and distributed. They can take a hard look at what they are doing well and what needs to be improved. Honesty and transparency go a long way in building trust.

“Being transparent is the only ethical way for your nonprofit to function. It can also help build community partnerships, establish relationships with granting institutions, and impact the communities you serve through your mission,” writes Lindsey Baker Bower at Donor Box.org.

Environmental, social and governance initiatives, widely known as ESG, has immense implications for nonprofit organizations (NPOs) and nongovernmental organizations (NGOs) as well. Our guide “Understanding ESG for Nonprofit and Non-Governmental Organizations” is your go-to source for understanding ESG for the NPO and NGO audience.

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Manage Risk through Reporting

An employee makes a claim of discrimination based on their sexual orientation. An organization with a social justice mission only has white men in leadership positions. It’s revealed that an environmental organization doesn’t track the carbon footprint and impact of employee travel.

Reporting of ESG initiatives and results can also be seen as risk management for a nonprofit organization. Your mission and your reputation are everything;. Losing the trust of your donors, partners, and employees takes a long time to repair.

When these incidents happen, donors, volunteers, and corporate partners take note. If you know where your strengths lie and where you need to do more work, you can better control the narrative when you do report ESG metrics.

Reporting your ESG efforts and accomplishments builds trust and reputation, putting your organization in a better position to fulfill its mission. If you fall short, let people know what you’re doing to bolster or improve in those areas.

ESG Scrutiny Both Ways

You may even have policies that require your organization to look at the ESG records of companies before you do business with them. The Securities and Exchange Commission in 2022 announced standardized ESG disclosure requirements for public companies.

BDO’s Nonprofit Benchmarking Report showed that only 18% of nonprofits surveyed report evaluating their vendors, partners, and/or funders for their alignment to ESG policies and actions. Finding out about the ESG practices of funders helps prevent organizations from taking donations from questionable sources.

The scrutiny goes both ways, with potential funders seeking ESG information from organizations when considering where to spend their money. Nonprofit responsibility and accountability regarding ESG metrics is growing and will continue to expand.

Benefits of Transparency on ESG for Nonprofits

The nonprofit board plays a leadership role promoting ESG principles. You can show that your organization leads by example. Your transparency allows your current and future employees understand that you and your organization are focused on things that matter to them, including diversity, equity, and sustainability. Keeping track of your progress through ESG reporting helps potential donors and supporters figure out where to put their efforts and attention.

Your commitment to ESG standards and to transparency in reporting results could bring other benefits as well.

You will attract new board members who want to be part of an organization that makes social responsibility a priority. By encouraging diversity on your board and your leadership, your organization will benefit from fresh ideas and new energy.

Like-minded donors, volunteers, and employees are more likely to support organizations with ESG goals and results. Likewise, it will be easier to gain the support of corporate funders when they see the organization is fulfilling its mission in a socially responsible and sustainable way.

Your ESG standards results reporting could make you more competitive when seeking grant funding from other nonprofits, foundations, and government agencies.

As regulations around diversity and sustainability for nonprofits increase, your organization will have a head start on compliance. You will have an advantage over competitors in your space that should have paid more attention to the ESG reporting trends.

The advantages of ESG tracking and reporting are clearer when you consider the generations who will make up most of your employees, donors, and clients. According to Marsh McLennan, “By 2029, the Millennial and Gen Z generations will make up 72 percent of the world’s workforce, compared to 52 percent in 2019.”

These generations are at the heart of the push for ESG reporting and ethical business practices and expect their employers and social organizations to prioritize these issues. Recruiting new employees and talent, as well as new partners, volunteers, and donors, could depend on your nonprofit’s ability to track and report ESG efforts.

Where to Start or Continue

You may have metrics in place for ESG elements already but haven’t yet disaggregated them as ESG measures. Individual board committees may oversee certain aspects of ESG, such as an audit committee that manages risk.

According to Jennifer Hawkins, corporate secretary and chief of staff at the American Red Cross, if nonprofits want “a more robust ESG framework for tracking a wide range of metrics,” they will want to emphasize and centralize these metrics and results. Hawkins recommends that nonprofits include a section on ESG goals and results in their annual report.

Other recommendations for reporting and transparency include developing a dashboard or other tool on the public-facing section of your website and sending regular information and updates in newsletters or other communications. Your communications and marketing teams can use the data for social media and marketing efforts, and foundation staff can include the information in grant applications and donation requests.

The advantages of ESG reporting and transparency are clear. However, not all nonprofits are in the same place regarding experience and capacity. Hiring staff members such as a chief equity or social responsibility officer may not be practical or sustainable for many organizations.

Technology tools can help. It’s essential that the board lead by example in ESG matters, and that could include training for members who are not up to speed on the importance of ESG. Many board members are volunteers who have other jobs and responsibilities. They believe in the importance of ESG but may not know where to start.

Through solutions like BoardEffect, boards can evaluate and assess ESG metrics and capabilities through questionnaires and surveys. They can use this information to create individual training for board members, and in groups with a facilitator, if necessary. The conversations and questions that surface during training can be securely stored and easily referenced later as issues arise.

Training is a measure of ESG commitment and should be an element of organizational reporting.

Technology Can Help With ESG Transparency

Technology tools make it easy for your staff to track and compile data and information to report to board members. It allows your organization to showcase your accomplishments and identify where efforts need to increase. Partners, donors, clients, and others can easily see where your board and organization stand.

People want to know that organizations share their values before they meaningfully engage. Measuring and reporting on effort and progress toward ESG principles demonstrate your values and how they compare to other organizations in your space. It sends a strong message about who and what you are.

If you would like to learn more about how BoardEffect can support your board to manage ESG and governance, we’d love to speak with you! Request a demo and let us share how we help more than 5,000 boards in 48 countries.

BoardEffect, a Diligent solution, leads in providing innovative boardroom technology to nonprofit organizations. Serving 14,000 mission-driven organizations, Diligent empowers boards with tools to drive positive change. Our secure board management software streamlines operations, enhances governance practices, and enables confident decision-making. With BoardEffect, mission-driven organizations unlock potential, accelerate mission delivery, and make lasting impact in their communities.