Why funding ESG means investing in bigger changes

ESG, which stands for environmental, social and governance factors, first emerged in the corporate world as a three-part lens to help investors assess the non-financial impacts of companies. Awkward acronym aside, it has become a sophisticated framework for thinking about how organisations manage and measure everything outside their finances, and the concept has been growing rapidly in the not-for-profit sector.

In many cases, not-for-profits are already deeply engaged with all three factors, but don’t link them in an overt way.

For not-for-profit leaders already stretched by funding, delivery and reporting obligations, adopting an ESG framework might sound like one more thing to deal with, but the CEO of Think Impact, Suzi Young, argues that it can be central to good decision making.

And for funders, adopting ESG as part of their support for NFPs also means supporting good governance and better decision making, and building on organisations’ capacity to create positive change.

Earlier this year, Young co-hosted a masterclass on ESG and materiality at the Social Impact Summit in Sydney. She was joined by Think Impact colleague Dhruv Iyer and Settlement Services International social impact lead Kailly Hill.

"Organisations and not-for-profits have finite resources, time and investment, and there is never-ending need," Young said. "We need to understand how to make good decisions about where to prioritise precious time and resources for making a difference to the people or cause we are here for."

ESG, she says, is a structured way to think about what matters to an organisation and its stakeholders, and where its energy should go.
 

Why ESG, and why now

Organisations adopt ESG for different reasons. Funders and governments are increasingly using it as a common reporting language, which means not-for-profits that can't speak it are at a disadvantage when making a case for funding or policy change. 

Young described ESG as “still an emerging expectation rather than standard practice”.

But systems thinking is the reason Young keeps returning to. "The ESG process is helpful for not-for-profits of any size because it helps them think holistically," she said. "The system of E, S, and G makes you think systematically about environmental, social, and governance issues."

Young believes the environmental pillar is where most not-for-profit organisations have the largest gap. "Many not-for-profits are not mature in environmental thinking because it has not been on their radar," Young said. "They often do not have the resources to calculate their carbon footprint because they are busy delivering in the social space. But it is coming onto their radar."

That is partly because mandatory emissions reporting is expanding in Australia. Registered charities are currently excluded, but new requirements – which cover emissions across an organisation’s entire supply chain – could draw them in indirectly, 

Young said “regulatory pressure” was growing for organisations to address environmental issues. 

For example, for a care organisation whose workers drive to clients, fossil fuels are embedded in the cost of delivery. Young said some organisations have reduced their reliance on fossil fuels (for example, by switching to electric vehicles) and therefore their emissions.

Settlement Services International (SSI) is acutely aware of the impact of climate change. SSI works with more than 53,000 people each year across 57 programs supporting refugees, migrants, people with disability and women escaping violence. Kailly Hill, SSI's social impact lead, said the link between environmental and social impact was one of the most important insights from SSI’s ESG process.

"As the climate changes, increasing resource scarcity contributes to conflict and instability, which leads to migration, displacement and greater demand for services like ours," Hill said. "That's exactly the space we work in, and we're already seeing those trends globally."

"We work with many vulnerable people, and they're often the least able to withstand environmental impacts while also being the most exposed to them. There are increased barriers to evacuation, transport, access to information and services, poorer quality housing, and health impacts."

For SSI, "climate change is a driver of displacement," Young said. "People may not have the language for it, but climate change can be a reason people come to Australia. We can expect more people from the Pacific Islands."

Why SSI took on ESG

SSI had been using “integrated reporting” for several years, including in its annual report. The process organises reports according to how the organisation creates value across its programs. Hill said SSI already had a sophisticated framework for measuring social impact across its programs, but the ESG process added a new dimension.

"We were already doing work in all three areas – environmental, social and governance – but we weren't looking at it holistically," Hill said. "In particular, we weren't intentionally examining the connection between environmental impacts and social impacts."

As the organisation approaches the end of a three-year strategy this year, it is seeking to apply its ESG work to its next round of planning. 

Partly in response to the new framework, SSI introduced a strategic lens called “responsible futures”, focused on ESG responsibilities, and embedded ESG goals into its new strategy.

Hill said SSI worked with Think Impact to ensure its ESG plan was suitable for a not-for-profit.

"The ESG process … can feel very corporate, and there's a risk that it becomes mainly about compliance. At SSI, that wasn't what we wanted. Think Impact … understand impact, they understand purpose, and we knew they would keep those things front and centre."

Think Impact senior consultant Dhruv Iyer said, "If it is done well, ESG should work alongside or in harmony with the social impact framework an organisation already has … Anyone can write an ESG report. Reporting on ESG is relatively straightforward. The question is whether it gives your organisation any benefits."

What’s a materiality assessment?

Think Impact conducts double materiality assessments – a process that looks simultaneously at what the outside world does to an organisation and what the organisation does to the world. 

It involves desk research, peer benchmarking, a review of sustainability standards, and direct engagement with SSI's stakeholders: staff, clients, board members, member organisations, volunteers and service delivery partners.

The findings are then used to develop three linked outputs: an ESG strategy, an action plan, and an integrated reporting framework. The action plan set out specific actions, performance indicators and responsibilities for each material issue, while the reporting framework brings together the material topics, goals and indicators into a single structure for disclosure and reporting.

In SSI’s case, the process identified 15 material topics, grouped into five pillars: 

• environmental resilience and response
• client wellbeing and social cohesion
• healthy and inclusive workforce
• responsible governance and funding 
• sector leadership and influence. 

These topics were then plotted on a materiality “matrix” and prioritised into tiers. For instance, the study suggested that client wellbeing was critical to SSI’s operations, and that climate resilience and workforce diversity had the greatest impact on its communities.

For SSI, the biggest missing piece was related to the environmental pillar, and Hill said the organisation would respond with several initiatives, including closely tracking carbon emissions, and reducing waste.

“They're relatively small investments, but they're important foundational pieces."

ESG at other organisations

While SSI’s is a large and sophisticated example of an ESG strategy, the University of Sydney Union's – produced with Think Impact’s help – was driven by student expectations of environmental responsibility, a large campus footprint, and the need to align with the university's own net zero commitments.

The process involved a simpler materiality assessment and a one-day workshop.

In another example, Haven Home Safe, a community housing provider, was able to connect its ESG framework to its theory of change and to the community housing sector’s own ESG reporting framework. The sector framework was developed by Australian Community Housing to support impact investment, using standardised metrics.

That community housing ESG standard enabled lenders, investors and funders to see how ESG risks were managed and how positive environmental impacts were measured.

Smaller organisations, Hill said, "don't need to undertake a full materiality assessment involving large numbers of stakeholders. The important thing is to think from different stakeholder perspectives rather than relying solely on your own organisational viewpoint."

In many cases funders should be able to assess grantees’ ESG thinking without adding further reporting burdens “by looking at what an organisation has already produced rather than asking for something new”. 

“A strategy document, board papers or an annual report that shows evidence of prioritisation and stakeholder engagement may tell a funder more than a bespoke ESG submission would.” 

She said this could be built on with “a few pointed questions in an existing due diligence conversation” about “the most material topics” and decision making. 

Young said funders – whether government or philanthropic – should also be able to link their own ESG needs with those of grantees, without making things onerous.

“A funder can ask a grantee to map its priorities against the funder’s framework for transparency, without requiring those priorities to conform to it,” she said.

For example, Young said Haven Home Safe was able to link its ESG framework to the sector’s “without one overriding the other”. 

“An ESG framework gives an organisation, of any size, a systematic way to think about environmental, social and governance topics together, rather than in isolation. For funders, that systematic thinking is what makes an organisation’s judgement visible, not just well-intentioned,” Young said. 

Young said funders should not assume that existing acquittal reporting would do the same work as an ESG assessment.

“At its core, ESG helps an organisation understand how environmental, social and governance topics, both risks and opportunities, influence its ability to deliver on its purpose, and to act on that”.

“Acquittal reporting has a different purpose. It's about accountability for a specific grant: was the money spent as agreed, and were the promised outputs and outcomes delivered? It's program-specific and shaped by what the funder needs to know.”

She said some funders were now embedding ESG considerations into acquittal reporting.

What funders should be asking about ESG

“Asking grantees to do this work without resourcing just shifts the burden onto organisations that are likely already stretched,” Young said.

She also believes funding ESG work requires thinking long-term rather than from program to program.

“This is better funded as capacity building than as a line item in a program grant. A materiality process shapes the whole organisation, not just one program. In practice, that funding covers things like research, external facilitation, staff time to run a structured process, and follow-up support to act on what it surfaces.”

Often, working with NFPs on ESG starts with asking the right questions.

"Funders could ask how organisations are thinking about climate change in the context of their ability to deliver on purpose," she said. "That highlights governance, because it shows how well organisations understand the context in which they are trying to deliver impact, and how they are planning for the future."

The risk of a flood or storm is an example of what organisations need to factor into their thinking. A storm could lead to roads being blocked by trees, which could mean that workers would be unable to reach vulnerable clients. 

SSI experienced this issue when a flood meant newly arrived migrants in a rural area were left without access to food or services. 

"That is a climate impact directly affecting the ability to deliver services," Young said. "How are organisations managing that risk?"

Young said funders should be careful that ESG requirements do not just become another compliance burden. 

"It is not necessarily about imposing standard metrics," Young said. "The process is context-specific and encourages organisations to speak to stakeholders, get feedback, and prioritise. Funders asking the question can be a good lever, because it tells organisations this is important. But they also need to provide funding to do the work. Organisations need to be able to invest in themselves."

She said employing a materiality process could help an organisation focus its efforts on topics such as people, the environment and long-term success. 

“Prioritising those topics sharpens strategy, manages risk and directs resources to where they'll have the greatest effect.”

More information

Whitepaper: Shifting to outcomes orientated grantmaking

Institute of Grants Management: evaluation resources | best practice resources

Think Impact