First produced in June's issue of Charity Finance

While social care charities are, by definition, providing a solution to a social issue, like the rest of the charity sector many are increasingly aware of wider environmental, social and governance (ESG) issues too.

ESG reporting is becoming an important focus for many charities, but the exact definition of the term remains relatively unclear. It can be helpful to consider what each of the letters in this acronym means.

• Environmental: the narrative around the environmental aspect has become associated with climate change, net-zero carbon emissions, and the energy transition, and could arguably be broadened to include wider social and physical aspects of the environment, such as dignity and wellbeing, or biodiversity and conservation.
• Social: social encompasses ethical behaviour and practices towards staff and beneficiaries, and the wider contribution to the sustainability of the socio-economic framework.
• Governance: governance encompasses control and direction, with a focus on the way a charity sets out to address risks and opportunities.

ESG as an opportunity for charities
ESG reporting provides an opportunity to tell a charity’s story about its part in the movement towards a sustainable future. Meaningful, authentic ESG reporting can be moulded around each charity’s ethos and values. The other spectrum of ESG has been the initiatives driven by the passions of the charity’s beneficiaries and staff alike to create eco-initiatives and lead on new policies. Reporting on ESG, rather than being a tick-box exercise, could be an opportunity to evaluate what more can be done.

Increasing public benefit
Another consideration for ESG reporting is the work charities do regarding public benefit reporting. In England and Wales, trustees must confirm that they have applied the Charity Commission’s guidance on public benefit. Public benefit is seen to be part of the social aspect of ESG. When thinking about how to include the governance aspect within reporting, the Charities SORP provides guidance to those preparing charity accounts.

While the SORP does not expressly consider ESG reporting, aspects of its existing requirements do coincide with elements of ESG. Similarly, the Charity Governance Code (2020) encourages elements of ESG.

How can charities report on ESG?
There has been a noticeable drive towards greener activity, meaning ESG has climbed up the agenda. Currently, there is no watchdog or regulator offering support for organisations adapting their practices to become more sustainable. This makes it difficult for many charities to see how they can implement ESG reporting practically and in a meaningful way.

The Charity Commission has previously engaged with ESG reporting and the guidance is typically supportive of sustainability being incorporated into the charity’s approach, provided it aligns or is complementary to, the charity’s overall objectives. The two are also linked, with ethical considerations having a positive effect on public trust. The SORP Committee identified sustainability reporting as part of their discussions for developing the SORP.

Further hurdles
While there are lessons to be learned from current corporate reporting, they are by no means always best practice. More weight needs to be placed on the social and governance aspects of ESG, rather than the current focus on the environmental one. The nature of many charities means that ESG can be inherent, but consideration still needs to be given to issues such as employment and safeguarding.

As well as the resourcing issue, ESG reporting might create challenges around who takes responsibility for collecting the information. If reporting lies within the annual report, finance teams could already be struggling for capacity, so charities may need to consider which system would work best for them.

Looking forward
There are currently three options available to charities:

1. Do something new.
2. Imitate existing reporting.
3. Let sleeping dogs lie.

However, keeping an eye on future plans and the impact on the wider community is key.

Importantly, we need to stress that charities are already likely to be doing more than they think and it is a matter of teasing out the relevant aspects for reporting. The way this is communicated, whether through websites or annual reports, is also an important consideration.

Lee Stokes is partner and head of care & community at haysmacintyre

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