With roots in the Ethical Investing Movement, the drive to create ESG programs underscores a fundamental difference between publicly traded for-profit companies and nonprofits.  The overriding purpose of all for-profit corporations is to return value to their shareholders.  Whether they operate banks, drill for oil, or develop computer software, all for-profit corporations are considered successful when they enhance their owner’s wealth by paying dividends or increasing the value of their stock.  The Ethical Investing Movement highlighted that corporations could be highly successful by that criteria even when they were engaged in behavior that might be ethically challenging, like running gambling casinos, manufacturing firearms, or selling alcohol products.  The Ethical Investing Movement encouraged investors to invest in companies not profiting from these activities.

The ESG movement went one step further by pushing publicly traded companies to show that they were not only refraining from engaging in these objectionable activities but were otherwise good corporate citizens that did their best not to pollute the environment, behave in a socially-responsible manner with a diverse workforce at all levels of staff and management and run their agencies using parameters that would assure they would have “good governance.”

What followed was a torrent of consultants promoting their own ESG scoring systems and offering their services to help companies prove they were good corporate citizens.  A countermovement labeled ESG “woke,” reminding people that the fundamental purpose of for-profit corporations was profit and suggesting that forcing political correctness only distracts from that purpose.

The call for ESG reviews prompted numerous legal analyses and spirited debate among corporate attorneys.  Advocates split into the two expected warring camps, with only a few lawyers moving into the no man’s land between the two.  An example of this “middle ground” is an article by Leo E. Stine, Jr. in the Spring 2023 edition of the American Bar Association’s The Business Lawyer, titled: “Good Corporate Citizenship We Can All Get Behind? Towards a Principled, Non-Ideological Approach to Making Money the Right Way.” Stine suggests an approach that might get support from both camps (if not the political advocates who have made this a cause celeb) would be to ask corporations to focus on how “their behavior affects the stockholders, customers, creditors, and communities of operations.”  That could lead the corporation’s board to consider policies that support a living wage for employees, hiring practices that open employment to everyone regardless of race, ethnicity, gender, sexual preference or orientation, making commitments to producing safe and high-quality products, supporting important community organizations (schools and hospitals), etc.  Strine also proposes a process for the corporation to go through before it engages in political activity.

ESG is probably here to stay in the publicly traded arena – too many investors are interested in investing in companies with good answers to questions about protecting the environment, the company’s approach to current social issues and how it structures its corporate governance.   But to be fair, most large corporations should be able to pull together documentation attesting to their stellar performance on most ESG issues. Even the worst industrial polluter will tick off all they are doing to update their systems and limit their output of toxins.  Then they will remind you that they have enlightened policies regarding social concerns … and a best-in-class governance structure. So for publicly traded for-profit corporations, who probably have to engage in an ESG analysis, the question becomes: Are we doing this to look good to our investors or are we willing to have an open, thoughtful and sincere discussion about our corporation’s impact on the world?

But what about Nonprofits?

Nonprofits don’t have shareholders, so what may be necessary for a publicly traded for-profit company to justify its worth to investors is not a concern for nonprofits.   While it’s not illegal for an NP to have financial success (remember “No margin, no mission”), an NP’s key measure of success lies in the value of the services it delivers.

But is an NP’s approach to environmental concerns, social justice issues and governance irrelevant?  Hardly. 

Arguably, Pollution and Global Warming involve some of the most significant challenges humanity faces today.  Every individual and business should be making a conscious effort to engage in environmentally friendly behaviors, be it recycling, regulating the thermostat or otherwise reducing behaviors that can make matters worse.

Many NPs have a diverse workforce and serve diverse and low-income populations.  These organizations would score high on any ESG survey’s “S” factor.  But that commitment was probably there from the origins of the NP.  An agency’s diverse workforce is often a reflection of the jobs being offered, the population the NP serves and the community it recruits from.

An ESG initiative could be easily justified if it resulted in a detailed look at the NP’s governance system that would ultimately lead to the creation of a board Governance Committee.  Bad governance structures and bad governance behaviors have led to the collapse of NPs that have been stalwarts of their community for decades, major employers and providers of essential community services.  Many governance failures are easily identified and often exist “in plain sight” because the board lacks the will or the desire to address them.  These failures often tie back to directors not following one or more of their fiduciary duties, including The Duty of Care, the Duty of Obedience, and the Duty of Loyalty.

For nonprofits, the question becomes:  Is this where we want our volunteer board to spend its time?

Directors of NPs have a limited amount of time to devote to their very important roles.  Directors take on an extensive list of legal obligations that govern their behavior and the agency’s activities for which they are responsible.  To fulfill their duties, they must remain informed about all their agency’s significant operational developments, its changing financial situation and any pending regulatory matters.  They also need to stay informed about industry changes and potential threats to their agency’s survival, all the while charting the future path of their agency.  Would an ESG program help them fulfill these duties?  Possibly.

But if a board wants to undertake an ESG initiative, it should consider expanding it to a conversation about ESG-C.  What is ESG-C?  That is the subject of an upcoming blog.

So, does my nonprofit board need an ESG Committee? 

No.  Nonprofits are not required to have ESG Committees or even engage in ESG discussions.  If the board determines that an ESG conversation could be helpful, there is no need to create a new board committee.  ESG discussions can occur in any forum: the Strategic Planning, Governance, Finance Committees or a temporary work group.

What is an ESG Committee for nonprofits?

An ESG Committee for nonprofits is a dedicated group within the organization responsible for addressing Environmental, Social, and Governance (ESG) issues. This committee focuses on evaluating and improving the nonprofit’s environmental practices, social impact, and governance procedures.

Are ESG Committees only relevant to for-profit corporations?

No, ESG Committees are not limited to for-profit corporations. While the ESG movement originated in the corporate sector, its principles can be applied to nonprofits as well. Nonprofits can benefit from considering their environmental impact, social responsibility, and governance practices.

What distinguishes ESG considerations for nonprofits from those for for-profit companies?

While for-profit companies often need to justify their value to shareholders, nonprofits have a different focus on delivering valuable services rather than generating profits. However, both sectors can benefit from ESG considerations, with nonprofits emphasizing their impact on the community and good governance practices.

Is creating an ESG Committee mandatory for nonprofits?

No, nonprofits are not required to create ESG Committees. The decision to establish such a committee depends on the organization’s goals, resources, and priorities. ESG discussions can take place within existing committees or temporary workgroups.