Charities and ESG

ESG is about doing good. So surely all charities are on top of ESG matters?

By definition charities are institutions that advance exclusively charitable purposes – all good stuff like advancing education, relieving poverty, conserving the environment – and for the ‘public benefit’, which means that their purposes must be beneficial and any detriment or harm that results from those purposes (to people, property or the environment) must not outweigh the benefit, which should be for the public or for a sufficient section of it.

However advancing their purposes does not mean that charities should stop there, or that they should not be more systematic about how they operate or be encouraged, as they were by the last Chair of Charity Commission, to ‘live their values’, because like every other organisation they are being judged not just by what they do and how much of it they do, but also by how they do it and the impact they are having – positively or negatively – in the wider world.

You might think most charities would have at least the ‘S’ and ‘G’ covered, if not the ‘E’ (unless they are environmental charities), but that might not necessarily be the case.

E is for the Environment

There are of course examples of excellence across the sector.

Twelve years ago in Grantham, The Woodland Trust swapped a brick-panelled industrial building for an energy-efficient building, sitting lightly in its surrounding landscape, with three storey vertical windows on the north and south elevations providing natural light and ventilation, and a timber structure modified in a highly innovative way to increase thermal mass, making the building carbon negative and offsetting five years of operational carbon.

While over in the North West, Groundwork Greater Manchester helps people reduce their use of resources to save money and become part of the movement battling the climate crisis. Its Green Doctors are energy efficiency experts who provide free and impartial support to residents to help them to stay warm, stay well and save money on their household bills.

But how are all other charities doing? The largest charitable companies are already subject to specific statutory obligations. By ‘large’, we mean those that meet two or more of the following criteria:

• turnover (or gross income) of £36 million or more
• balance sheet assets of £18 million or more
• 250 employees or more

Those charities need to report on how their directors (i.e. charity trustees) have carried out their s.172 duties under the Companies Act 2006 and how they have complied with The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (“SECR”).

Section 172 requires charity trustees to act in the way they consider, in good faith, would be most likely to achieve their charity’s purposes, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long term, and the impact of the company's operations on the community and the environment.

The 2018 Regulations require the same companies – provided they have consumed (in the UK) more than 40,000 kilowatt-hours (kWh) of energy in the reporting period – to include energy and carbon information within their directors' report.

As audit and consulting firm RSM suggests in its 2022 survey What does ESG mean for the charities sector?, even if charities are not required to comply with SECR they should consider whether they ought to do so as best practice, because knowing how much energy they use can help inform energy efficiency activities: never more important than during an energy crisis.

The recent court decision in Butler-Sloss and Others v The Charity Commission and Attorney General highlights how even charities whose purposes are not focussed on the environment can still legitimately put the planet before return on investment and address the existential threat faced by our world and all life in it, if their trustees consider, all things considered, that this would best advance their charitable purposes.

S is for Social

Charities exist to make a positive difference. But in striving to serve their beneficiaries they may do a disservice to those people or to the staff and volunteers who deliver their mission by the way they go about their business. Have a look at the charities press in particular since around 2014. While the media by its very nature focuses on scandal, it is undeniable that not all charities have always looked after those with whom they come into contact (which is how the commission assesses whether charities have fulfilled their safeguarding obligations).

Exerting pressure on vulnerable people while fundraising, sexual and racial harassment within charities; trading aid for sex with some of the most vulnerable people in the world; toxic cultures within organisations led by unaccountable cabals; bullying of staff – the list is quite a long one. It shows that even charities do not always get it right all of the time – and sometimes some of them get it spectacularly wrong.