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Making ESG a reality takes focus, data and disclosure

Opportunities and challenges for not-for-profits

RFP
Autumnal Alley Grant Thornton and HSBC Private Bank hosted a timely webcast, The Future of Environmental, Social and Governance (ESG) Practices for the Not-for-Profit Industry, with Dennis Morrone, National Managing Partner, Not-for-Profit and Higher Education Practices, Grant Thornton; Jeffrey Bartfeld, Sector Head for Higher Education and Not-for-Profit, HSBC Commercial Banking; Jose Rasco, Chief Investment Officer, HSBC Wealth and Private Banking, Americas; Carly Doshi, Head of Wealth Planning and Advisory, HSBC Wealth and Private Banking, Americas; and Karen Kearney, Treasurer, Stanford University. The discussion provided valuable insights on ESG best practices and a working model for organizations looking to develop their own strategy.

North American markets have seen an important shift in the last year. Organizations are moving beyond broad environmental, social and governance (ESG) commitments and into planning and implementing specific action plans and related metrics to track progress. In the past, many not-for-profit organizations performed ESG activities with good intentions, however, such activities were often unfocused and unstructured. Today, organizations are incorporating their ESG efforts into their operating models — canvassing the level of interest among constituents and stakeholders for what ESG means to them — in order to craft a focused and strategic way forward.

The time is right This new focus has been driven in large part by the maturity of the ESG movement. As just one signal of the increased prominence of ESG in North America, Morgan Stanley Research, Bloomberg, reported that $164M in green and social municipal bonds were issued in 2011, while $19.7B were issued in 2020. Networks are being formed, infrastructure is being created and skeptics are getting on board.

 
“We are at the confluence of technology and sustainable revolutions that could result in improvements in productivity and profitability for years to come.” —   Jose Rasco
Chief Investment Officer, HSBC Wealth and
Private Banking, Americas
In fact, Jose Rasco of HSBC believes we may be at the kind of tipping point that the automotive industry experienced in its infancy: "Customers asked, ‘When this horseless carriage runs out of this liquid, where do I get more liquid?' A new infrastructure had to be built to facilitate the emerging technology. Today, that infrastructure is called gas stations. At the time, it was viewed as an extremely expensive investment that could take time to build. We are at the confluence of technology and sustainable revolutions that could result in improvements in productivity and profitability for years to come.”

Likewise, ESG can pose significant strategic and tactical challenges because of its broad scope and rapid evolution. This is despite the movement’s apparent alignment with not-for-profits because of their purpose-driven missions.

 
“[Clients are] asking important questions about the market behavior and investments of the organizations they support philanthropically and are asking nonprofit leaders to align with ESG.” —   Carly Doshi
Head of Wealth Planning and Advisory, HSBC
Wealth and Private Banking, Americas
The good news is that philanthropic donors are not simply on board; rather, they’re driving the conversation and pushing for change. Carly Doshi of HSBC said, “My observation in working with extremely sophisticated individual philanthropists and large grant-making foundations is that this conversation is absolutely being driven by our clients.”

Doshi added that those clients are well informed. “They’re asking important questions about the market behavior and investments of the organizations they support philanthropically and are asking nonprofit leaders to align with ESG — not just as aspirational goals, but also as table stakes for philanthropic engagement.”

The question is: How do institutions engage in — and lead — this conversation, especially when ESG means different things to different stakeholders?

Use a materiality assessment to define your strategy How does an organization take meaningful action in the ESG space without being overwhelmed by possibilities or frustrated by practicalities?

Integrating, implementing and realizing success in ESG strategies start with gathering information to design an approach that will be impactful for your organization. Determining a reasonable approach depends on identifying your position on the ESG maturity curve — denoted by your organization’s mission, size, complexity, geography, regulatory environment, access to data, current systems, ambition and level of institutional leadership buy-in.

After you have made these determinations, the next step is to conduct a materiality assessment. Of all the available topics to pursue within ESG, what is most relevant to your stakeholders and what will have the greatest impact on your operations? For example, a focus on biodiversity may be crucial for nonprofits working within the climate space but less relevant to an organization providing shelter to the homeless.

With your strategy defined, your organization can limit the number of ESG topics it’s focused on in order to ensure tangible progress across each — and learn lessons to apply going forward. Such an approach can help you feel confident and act consistently in your ESG journey.

Narrow your focus, deepen your efforts After you’ve prioritized material topics, look at the technical aspects of implementing, tracking and communicating progress. This typically begins with data and disclosure.

While SEC requirements are not applicable to not-for-profits, an informal reporting standard is expected to arise soon prompted by stakeholder pressures, making meaningful data and clear communications essential. For example, gathering the relevant data for greenhouse gas (GHG) footprint reduction might involve these steps:

  • Inventory the real estate you own or rent
  • Identify the people who understand the operation and use of those properties
  • Request and consolidate existing sources of data
  • Determine the additional data needed and how to gather it
  • Trace the value chain
  • Apply the appropriate science-based calculations
  • Centralize responsibility for the initiative
  • Set benchmarks and milestones
  • Put relevant controls in place

 
“[It was] important to get external verification of our use of proceeds and to signal to the market that we were very concerned about best practices and adopting the highest possible disclosure standards currently expected by investors.” —   Karen Kearney
Treasurer, Stanford University
As you undertake such initiatives, pay close attention to how you communicate your efforts. Especially in the not-for-profit environment, where one can be forgiven for thinking a purpose-driven mission is enough, it’s especially important to state what you are planning to do. Specifically, communications play a vital role in addressing and managing stakeholder concerns and expectations. This means crafting forthright disclosures, making scrupulous claims, adopting realistic and measurable metrics, and setting achievable goals. In some cases, such as issuing an ESG bond, it might make sense to arrange for a third party to provide objective assurance. Karen Kearney of Stanford University shared her institution’s experience: “Because this was our first ESG bond, it was important to get external verification of our use of proceeds and to signal to the market that we were very concerned about best practices and adopting the highest possible disclosure standards currently expected by investors.”

As scrutiny over ESG data continues to increase, take steps to avoid greenwashing — talking a good ESG game without following up with meaningful action or, conversely, overstating the significance of the actions you have taken. Forthcoming SEC regulations regarding ESG topics will raise the stakes for disclosures; while such regulations would not apply to not-for-profits, there might be some transferable reporting best practices of relevance to adopt.

Your not-for-profit has special opportunities — and challenges Not-for-profits can seize a number of ESG opportunities, but each comes with its own challenges. For example, universities and other not-for-profits can apply ESG principles to their endowments and, as the holders of considerable investable assets, they are in a uniquely powerful position to advance positive change by selectively and intentionally investing such resources in a manner that aligns with ESG goals.

In light of the above, endowments must still comply with state, federal and prudent investor rules. In the early years of socially conscious investing, this posed special challenges. Jose Rasco pointed out, “Investing in something that didn’t have a positive screening strategy and investing in something that didn’t necessarily make money wasn’t really investing; that was more philanthropy or giving.”

Fortunately, the growth of impact investing — comprising, in part, positive screens (which include funds whose ESG policies provide a material advantage) and negative screens (which exclude funds with ESG flaws) — makes it easier for institutions to be both socially responsible and good stewards of funds. Because of this, it’s especially important to be thoughtful in the selection of fund managers.

Similarly, institutions of higher education can do more than meet today’s expectations. They can educate the next generation to preserve the environment, advance positive social change and promote good governance.

Ultimately, not-for-profits are well positioned to advance ESG solutions. The key to their broad success is a smartly conceived strategic approach to the many options available.

5 key takeaways
  1. Identify your place on the ESG maturity curve. What’s a reasonable approach, given your organization’s mission, size, complexity, geography, regulatory environment, access to data, current systems, ambition and level of institutional leadership buy-in?
  2. Focus on materiality. Of the available options, which are important to your stakeholders and will have the greatest operational impacts?
  3. Target your efforts. Devote time and resources to prioritized projects.
  4. Prioritize accurate data and disclosure. These are especially important in the absence of SEC or other regulations applicable to not-for-profits — and for providing assurance in a market moving toward addressing instances of greenwashing.
  5. Acknowledge the unique position of your nonprofit. Given the pervasive recognition of the need to address ESG, you are likely in a position to effect great change.

For further information and details, register to replay the webcast, The Future of Environmental, Social and Governance (ESG) Practices for the Not-for-Profit Industry.

Contact:

Dennis Morrone Dennis Morrone
National Managing Partner
Not-for-Profit and Higher Education Practices
T +1 732 516 5582