Environmental, Social and Governance (ESG) is a vital consideration for any business in any sector. But for those operating in the third sector, it has a heightened importance that cannot be ignored.
ESG is very high on the list of consumers’ priorities in today’s society. People are becoming much more aware of their environmental and social impact, and are carefully considering the organisations they support, so charities can use ESG to build their reputation and attract supporters and donors.
With this in mind, prioritising ESG is no longer just about environmental and social responsibility; it is a strategic approach to maximising long-term profitability and operational efficiency.
The Kreston Global UK Charities Report 2025 showed that the majority of charities (80%) are experiencing pressures on their income streams, and reduced funding is seen as the biggest emerging risk.
With service provider contracts becoming fewer and lower in value due to local government funding cuts, charities are increasingly relying on donations as one of their main sources of income.
It is here that charities can use ESG to their advantage to boost financial resilience and impact their bottom line. Recent surveys have shown that 88% of consumers are more loyal to companies that support social and environmental initiatives, and 76% would stop buying from companies that treat the environment poorly. The same is true of the charity sector, where 36% of adults say they would be more likely to donate to charities that invest funds in environmental sustainability, and 81.5% of Cancer Research UK’s supporters say it is important that the charity is sustainable.
Because individuals and organisations value ESG so highly, they are much more likely to support charities that align with their values, so implementing ESG practices and clearly communicating them can play a prominent role in attracting and retaining donors.
This applies to wider income generation strategies, too. Stakeholders, including corporate partners, trusts and foundations, expect charities to operate in an ethical, sustainable and transparent manner, and ESG provides a framework for demonstrating these qualities. Without it, charities run the risk of losing key investors and threatening their income streams even further.
In the past, charities have faced challenges around public trust due to concerns over governance and financial management. However, this seems to have turned a corner in recent years, with public trust in charities remaining consistently high since 2020 and 57% of people having high trust in 2025.
But charities should not become complacent, especially as the impact of the Iran War begins to be felt on the UK economy. Maintaining the trust of donors and stakeholders is imperative, especially since the previous cost-of-living crisis halved the value of charitable donations in 2021-2022 and saw 1.6 million fewer people give to charity.
By disclosing the results of ESG practices, charities can demonstrate their commitment to responsible and accountable governance, as well as enhance their transparency and foster confidence in their donors’ investments. For larger charities, this is something that has recently become mandatory under the Charities SORP 2026, which states that charities with income over £15 million must report on their ESG management, including climate risk, carbon and social impact.
Whilst not currently mandatory for smaller charities, they are still encouraged to include some ESG reporting in their trustee reports, and this could go a long way in building trust.
Whilst there’s no denying the importance of ESG for income generation, it can also play a key role in cutting operational costs, increasing reserves and improving a charity’s bottom line.
Charities can take steps to reduce energy and resource consumption, minimise waste, and improve efficiency in their processes and supply chains, not only reducing their impact on the planet but also providing a financial benefit.
A review of independent studies by Oxford University and Arabasque Partners found that 88% showed that good ESG practices result in stronger operational performance, and government research has shown that UK businesses could save £23 billion by improving the way they use energy and water.
ESG reporting can also help to improve finances because it encourages careful consideration of risk management, efficiency and more strategic decision-making. In an effort to improve sustainability, you’ll need to track cash flow and reevaluate suppliers and investments, and utilise available schemes and subsidies that support green investments.
As society becomes more aware of ESG issues, it’s clear that charities embracing ESG will be better positioned to succeed in the dynamic and ever-changing third sector. Those wishing to strengthen long-term resilience must take action now to embed more efficient ESG strategies in the years ahead, especially if pressures on income streams continue.
Duncan & Toplis provides accounting and business services specifically designed to support charities, including financial reporting, governance and risk management support, and cash flow management. To find out more, please contact Niall Kingsley or your usual Duncan & Toplis adviser.
