Over the past few years, the term ESG has gained significant prominence.
Initially this was predominantly in the context of ethical investment, with investors challenging fund managers over whether an investment was ethical in terms of environment, social responsibility and governance issues. Now, trustees are being encouraged to disclose in their trustees’ report how such responsibility dovetails with their charitable objectives and activities.
The expectation is primarily that the impact of the charity’s direct operations (ie buildings, cars and activities) is measured and reported; however, in the case of a grantmaker this is somewhat less relevant. What is more important is how the beneficiaries (grant recipients, both individual and charitable) ensure that they are living the values expected by the trustees.
Everyone will recall the launch of the concept of public benefit in charity financial reporting and broadly speaking this is defined as the benefits of an activity being more than its harm. A positive approach to ESG is aimed at maximising benefit and minimising harm. The challenge for trustees is that the responsibility of setting such targets and reporting against them sits with them and more important is setting the goalposts from which to measure success or otherwise.
The SORP has been somewhat non-prescriptive over such reporting and it is only the very large charities that meet the requirements for being a large company that must disclose under s172 of the Companies Act or SECR. That doesn’t mean that charities under the SORP don’t need to positively report on such matters, as charities are always encouraged to report impact in their reports. What it means is that such reporting is not prescribed and so the level of positive reporting is variable.
For grantmakers, my recommendation would be to look at what your key stakeholders would expect. This could be donors, founding families/trusts, beneficiaries, connected parties or the trustees themselves. There will inevitably be an opinion on what would be useful to promote the charity’s values. A grantmaker who supports education will be interested in inclusivity, governance and values, whereas a grantmaker supporting the environment will be much more interested in carbon footprint and attitude towards climate change, for example.
Understanding this will help you in determining not only what to report but also, and perhaps more importantly, what targets you will set yourself. The trustees’ report is expected to be a communication tool to build interest and confidence in your charity and how it meets the public benefit. For grantmakers your trustees’ report will be used by potential beneficiaries in determining whether to align themselves with your charity and, in the case of other stakeholders, it could be used to assess whether or not they wish to support you.
Indirect impact
So, the question for you is whether there is benefit in assessing indirect impact in the area of ESG. A small grant to an individual probably won’t warrant such scrutiny, whereas a large grant to an NGO outside of the UK will invariably warrant thought.
The established processes for reporting back to a grantmaker by beneficiaries of the charity is now mainstream, and so the reporting can be enhanced to be an ideal tool for gathering such data. A questionnaire could be used to help recipients focus their reporting and could also provide consistency of approach to help aggregate the results.
For some recipients, the capturing of such data will be reasonably straightforward due to the nature of the organisation, the type of projects and the importance of such matters to them. For others it might be more of a challenge and so there may be the need to gradually introduce with training and instruction.
Thinking specifically about the E in ESG, the Charity Commission has made it clear that incorporating environmental sustainability into a charity’s approach to its work is encouraged if it is “aligned” or “complementary” to the charity’s objects.
It is clear to me that public trust will be enhanced by clear ESG-compatible values that translate into reportable objectives and impact that can appear very clearly in your trustees’ report.
The days of trustees’ reports being only compliance tools are soon to be a thing of the past but at the same time you should be able to tell your story your way, and so the lack of prescriptive reporting under the SORP should encourage you to write creatively in your communications to stakeholders.
Getting the facts to be able to do so is a challenge, but one that is worth thinking about as grantmakers have a significant voice in promoting strong ESG values.
Adam Halsey is partner and head of charities at haysmacintyre
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