Environmental, social, and governance (ESG) considerations are increasingly important to non-profit boards for a variety of reasons. In this article, we will explore why ESG matters to non-profit boards. 

What is ESG?

First, it's important to understand what ESG means. ESG is a risk framework that began years ago when financial institutions began to realize that traditional financial risk models that assessed balance sheets and P/L statements, for example, did not accurately assess long-term risks. They were mere short-term snapshots of a company’s outlook.  In recent times with the political polarization occurring throughout the world, but especially in the U.S., there came a realization that financial institutions needed to help stave off systemic longer-term risks through what is now known as ESG. In a nutshell, it is the private market’s response to managing long-term risks and honing-in on more sustainable analysis of financial risks. 

How is ESG performance measured?

ESG risk analysis is conducted through the lens of long-term environmental, societal, and governance risks. To help investors, underwriters, and lenders to understand these risks, there are ESG performance standards and ESG ratings agencies that aid in standardizing a company’s performance outlook on E, S, and G risk factors. The risk factors in these categories vary in financial materiality depending on the industry itself. Because financial materiality on these issues differ based on industry, ESG ratings have algorithms that account for these differences which can help financial institutions compare and contrast companies and investments, similar to a credit rating but instead a sustainability rating. 

Generally speaking, 

• Environmental risks relate to a company's impact on the natural world (e.g. greenhouse emissions, impacts on biodiversity, use of natural resources such as water, energy, minerals, and impacts on solid waste and pollution impacts). Vice versa, environmental risks refer to the natural world’s impact on business (such as climate change-induced severe weather events and sea level rise) 

• Social risks refer to the potential threats or challenges that arise from a company’s relationships with its employees, customers, suppliers, and the broader community and how those risks can have an impact on a company’s business model, financial performance, and reputation.

• Governance risk factors refer to a company's quality risk controls, strategy, transparency, and ethical practices.

Why should non-profit boards consider ESG risks and opportunities?

1. Mission alignment: Many non-profits have missions that align with ESG issues, such as promoting environmental sustainability or social justice. By considering ESG factors, non-profit boards can ensure that their organization is taking a holistic approach to achieving its mission.

2. Reputation: Non-profits that prioritize ESG factors may be viewed more favorably by donors, volunteers, and the general public, which could improve their reputation and lead to increased support.

3. Risk management: Non-profits that consider ESG factors may be better able to identify and assess risks associated with their operations, which could help them avoid potential legal or reputational challenges.

4. Investment performance: Some research suggests that companies with strong ESG profiles may outperform their peers over the long term. As a result, non-profits that consider ESG factors when making investment decisions may be able to achieve better financial returns.

A non-profit board that considers ESG factors may be able to better align their organization with its mission, improve its reputation, manage risks, and potentially achieve better financial performance.

How should a non-profit board begin its ESG journey?

1. Identify and assess risks: Non-profits should first identify and assess the ESG risks associated with their operations. This may involve reviewing their policies and practices, consulting with experts or stakeholders, and conducting risk assessments. 

2. Develop an ESG risk management plan: Based on the risks identified, non-profits should develop an ESG risk management plan that outlines how they will address these risks. This plan should include specific strategies and tactics for managing the risks, as well as metrics for monitoring and evaluating their effectiveness.

3. Communicate with stakeholders: Non-profits should communicate with their stakeholders, including donors, volunteers, and the general public, about their ESG risk management efforts. This may involve providing regular updates on their progress, as well as being transparent about any challenges or setbacks.

4. Monitor and review: Non-profits should regularly monitor and review their ESG risk management efforts to ensure that they are effective and that any necessary adjustments are made. This may involve collecting data and feedback from stakeholders, as well as reviewing the performance of their ESG risk management plan.
 

In conclusion, non-profits should be proactive in identifying and assessing ESG risks, and should develop and implement a comprehensive risk management plan to address these risks.

Victor launched an ESG Risk Rating self-assessment tool to help policyholders assess their organizations against internationally-recognized ESG performance standards and frameworks. The tool is an excellent first-step to understanding ESG risks and opportunities, and provides policyholders with an ESG rating. 

If you have any questions, please email esgriskrating.us@victorinsurance.com.