There is a mutually beneficial and synergetic relationship between non-governmental nonprofit organizations (NGOs) and for-profit companies in Environmental, Social and Governance (ESG) topics. Not only can nonprofit NGOs adopt good environmental, social and governance practices in the course of their activities, similar to for-profit companies, but for-profit companies can also count on nonprofit NGOs to help them in projects that create positive environmental or social impacts, a true feedback relationship that generates benefits for all parties. It couldn't be any other way. After all, they share similar and compatible purposes and principles. There should therefore be a cross-collaboration between the for-profit and nonprofit entities in advancing the ESG agenda in order to boost value generation.

What is ESG?

The theme of sustainability has always existed in the corporate world, but in a mandatory and less participatory way. Historically, the government borne the main role of promoting sustainability, pressuring companies through the enactment of laws and regulations. Sustainability discussions now take new contours. The corporate world is under pressure from investors (through the allocation of capital in sustainable projects), consumers (through boycotts of unsustainable products), employees (who demand a now look to human capital management and talent acquisition) and society in general. The "stakeholder capitalism" is no longer an investment niche of few organizations concerned with social and environmental issues and now reaches virtually the entire traditional economy. Companies are expected to be actively engaged in solving social and environmental problems.

In this context, the ESG theme has served as an important factor to boost sustainable development – "one that meets the needs of the current generation without compromising the ability of future generations to meet their own needs".[1]

The ESG approach requires the evaluation of businesses, companies, institutions and even countries not only from an economic point of view, but also according to environmental, social and governance indicators. The corporate environment is evolving; those who resist will be not only on the wrong side of history, but also at a competitive disadvantage.[2] In these new times, consumers and society at large expect much more from businesses. They are not satisfied with companies that seek only profit. Organizations that accept these responsibilities and are able to meet their stakeholders’ expectations will ultimately bring greater benefits to its shareholders.

In addition to contributing to a healthier and fairer ethical society, good ESG practices are related to several benefits, such as risk mitigation, better capacity for innovation and adaptation, cost reduction, good reputation, attracting new generation talent, resilience to adverse scenarios, among others. For these reasons, what was once an issue reserved for activists is now increasingly present in the daily lives of investors and the financial market.

A study by the Morgan Stanley Institute for Sustainable Investing showed that sustainable funds outnumbered traditional ones and reduced investment risks during the covid-19 pandemic. Although the crisis caused a global recession and huge market volatility in 2020, sustainable funds have achieved better performances than traditional ones. An analysis of 3,000 mutual funds and Exchange Traded Funds - ETF (indexed exchange traded funds) in the United States showed that sustainable funds performed 4.3% above the median of traditional funds in the last year.[3] Also, according to Morgan Stanley, in early 2020, 1 in 3 dollars under professional management in the U.S. was employed in a sustainable investment strategy, totaling approximately $17.1 trillion, up 42 percent since 2018.

Among the metrics most commonly used in the ESG theme, the following stand out:

Environmental

  • Proper waste management
  • Efficient management of water, clean energy and other resources
  • Emission of polluting gases
  • Deforestation
  • Biodiversity

Social

  • Enforcement of labor rights and labor safety
  • Talent attraction and retention
  • Employee welfare
  • Encouraging diversity and gender protection
  • Human rights and positive impacts on society
  • Data protection and privacy

Governance

  • Transparent corporate governance practices
  • Compliance and promoting ethical values in the conduct of business
  • Composition of the Board of Directors
  • Relationship with government entities and politicians

What is the third sector?

The first sector includes the State and its public institutions, the entities of direct and indirect Public Administration, traditionally the main responsible for coping with social and environmental problems. The second sector is the private sector, composed of the private non-governmental initiative, usually companies with the aim of obtaining profit – that is, the market. The third sector is formed by private non-governmental organizations without the objective of profit that perform voluntary activities developed in favor of society and the public at large, independently of the other sectors (government and market), although with them can establish cooperation agreements and partnerships and can receive funding from them.

The third sector is a direct result of the inability of the public authorities to solve certain social and environmental problems, thus making great room for the prominence of civil society. The performance of the third sector promotes an active and participatory civil society, which seeks the public interest and provides better services to the community. In addition, it makes civil society more engaged and interested in participating in state decisions.

Among the best-known non-governmental organizations in the third sector are charities, social organizations, non-profit entities, community funds, foundations, and various types of associations.

How ESG can help the third sector and vice versa

In view of the previous definitions, it is clear that there are common objectives between companies and the third sector in the search for environmentally, socially and governance-sustainable practices.

Several ESG practices developed by private companies can also be used by nonprofit organizations, such as governance, return and impact measurement and efficient capital allocation, to promote greater efficiency in the administration and use of resources. The use of corporate governance mechanisms of for profit companies by the third sector allows to achieve the objectives of:

  • Transparency: making clear, true and complete information available to all stakeholders, including sponsors, donors, partners and supported communities;
  • Equity: fair treatment of all stakeholders, avoiding discriminatory attitudes or policies, under any pretext;
  • Accountability: accounting and measurement of social impacts and project efficiency) by managers (members, directors, executives, tax advisors, auditors); and
  • Sustainability: adoption of social and environmental considerations in the definition of programs, projects and operations, with a view to the longevity of the organization.

Similarly, we can imagine several forms of collaboration between nonprofit entities and companies in relation to ESG practices. In this sense, nonprofit organizations can, for example, work together with companies in projects and terms of partnership or consulting, lending the experience and knowledge acquired in the pursuit of their causes, to assist in the supervision and development of ESG performance indicators in the corporate world. This would be the case of an NGO focused on protecting the environment that helps private companies verify the achievement of pollution and deforestation metrics. Or the situation of an entity engaged in the fight against gender inequality that assists private companies in adopting measures to increase the representativeness of women and blacks in their payroll and senior management. Both sides benefit: the NGO, advancing its cause and creating a new source of fundraising and partnerships, and the company, with a more efficient way to monitor its metrics, achieve goals and achieve greater transparency in its commitment to such metrics.

With the increasingly common formation of partnerships and agreements between the State and the organizations of the third sector, the Public Administration ends up having the task of supervising the legal entities of the third sector. Then comes a great opportunity for the managers of these organizations to take advantage of ESG practices to create a robust corporate governance structure that allows the adoption of control mechanisms, and to promote diversity, respect legality and follow principles of social and economic responsibility. This process helps make administration more efficient in order to prevent fraud and corruption, promote transparency, and take better advantage of resources.

Transparency driven by corporate governance can also increase the value of the entity, helping it in its fundraising initiatives and contributing to its own development. The adoption of best practices of corporate governance and sustainable performance from a social and environmental point of view can also inspire more confidence in key donors, giving them more peace of mind that their resources will be employed honestly, efficiently and responsibly.

Companies that adopt the ESG in their business model and their strategic planning have an incentive to promote donations to third sector institutions in order to help them in this cause, in view of their common interest in the environment and sustainability. The positive social and environmental impacts generated by NGOs with the support of private corporate donations ultimately backfeed the system and help companies achieve the sustainability goals required by shareholders, investors and consumers.

[1] Brundtland Report, UN, 1987

[2] Hunt, Vivian, Simpson, Bruce and Yamada, Yuito. The case for stakeholder capitalism, 12/11/2020. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-stakeholder-capitalism

[3] Institute for Sustainable Investing. Sustainable funds outperform peers in 2020 during coronavirus, 24/2/2021. https://www.morganstanley.com/ideas/esg-funds-outperform-peers-coronavirus