Pursuing ESG goals with a corporate foundation

Elizabeth Jones, Emma James and Sarah Gill at Farrer & Co ask whether a corporate foundation could support your business’s charitable goals

 

Today businesses are often multi-purposed organisations, keen to drive profits and wider social and environmental agendas. Establishing a corporate foundation (which in this article we use to refer to a charity founded by a business) is one way to pursue Environmental, Social and Governance (ESG) related goals.

 

Research from the Association of Charitable Foundations revealed that funds given by corporate foundations reached a record high of £239m during 2020-21. This growing popularity demonstrates that increasing numbers of businesses see the value in their own foundation. 

 

It can be particularly beneficial where a business is looking to support long-term, meaningful action on issues that align with their values, such as climate change, achieving the UN’s sustainable development goals, and work on diversity, equality, and inclusion. 

 

So, for businesses that are thinking about delivering impact in this way - what do they need to know?

 

How are corporate foundations structured?

Corporate foundations can be established using a range of differing legal structures to suit the specific intentions of the foundation and its founding business.  

 

The key feature of a corporate foundation is that it must be independent of the business’ operations and its trustees must make decisions that are solely in the best interests of the foundation (and not in the interests of the business) 

 

The foundation’s trustees must focus solely on pursuing the foundation’s defined charitable purpose(s). These can be wide ranging and include improving access to education or advancing environmental causes and those purposes must be for the public benefit. 

 

The business’s interests must not determine how the foundation achieves those purposes. It is for the trustees of the foundation to exercise their discretion to select beneficiaries or form partnerships with other charities. The trustees cannot simply commit themselves to giving effect to the policies and wishes of the business. 

 

The foundation’s trustees are responsible for maintaining independence from the founding business, whilst also nurturing the special relationship with the business that supports the foundation and allows it to deliver impact.

 

Corporate foundations can help with ESG aims

ESG has become the term by which corporates and other organisations demonstrate (and often measure) their commitments to environmental, social and governance initiatives. How then, might a foundation support meeting those commitments? 

 

Corporate foundations can be an effective vehicle to enable organisations to meet their ESG commitments within a structure that is separate from the business, that isn’t limited by the commercial goals of the founding business and is not answerable to shareholders. They can also provide a highly effective structure through which to pursue grant-making and partnerships with other charities. 

 

In addition to working towards ESG goals, businesses can derive reputational benefits from demonstrating ongoing commitment to charitable projects operated by their corporate foundation.  Foundations can also deliver benefits for company culture and talent satisfaction with both employees and stakeholders. 

 

Key points to consider

While establishing a corporate foundation can offer numerous benefits, it is important that businesses understand the risks and investment involved. 

 

Charities are highly regulated by the Charity Commission and having the right advisers when establishing a foundation is crucial to ensure the structure is compliant, robust and is capable of delivering on the business’s ambitions for the foundation. 

 

Organisations should also be mindful that if a corporate foundation’s name contains the business name as is often the case, there is an inherent risk to its reputation if any regulatory complications for the foundation arise.

 

To mitigate this risk, it is essential to structure the foundation in a manner that minimises future regulatory issues and ensures compliance with the Charity Commission’s expectations. This requires establishing a clear framework from the outset that ensures the foundation maintains its independence and that any conflicts of interest are managed.

 

Furthermore, there will almost certainly be compliance and administrative costs involved with establishing a corporate foundation.

 

Alternatives to corporate foundations

If a foundation is deemed not to be the optimal course for a business in pursuing its ESG objectives, there are other options, such as donating money to established charities or giving in-kind through volunteering programs. 

 

Sometimes, a business may favour a broader, value-driven approach that allows it to demonstrate its reputation for sustainability, environmental performance and accountability. In such cases, obtaining a B Corp certification could be an attractive alternative.  Becoming a B Corp recognises a business has a purpose that requires it to consider its social and environmental performance and deliver value for more than just its shareholders.   

 

When do we see businesses choosing to set up foundations?

The establishment of a corporate foundation is likely to arise as a business scales, where it has, whether organically or by investment or acquisition, additional capital or is producing revenues that can be utilised for to set up a foundation. 

 

Simon Ward a partner in the corporate team at Farrer & Co notes “where there is a corporate sale or investment, the company’s board or founders may well decide that some of the proceeds should be directed to its own corporate foundation which in turn will provide a benefit to both its internal and external stakeholders and the wider community.”

 

Are corporate foundations the future of your business?

More and more businesses have charitable targets they are working towards, and corporate foundations can serve as an effective vehicle through which to deliver impact, while allowing a business to continue with its commercial goals.

 

---

 

By Elizabeth Jones, Partner, Emma James, Associate and Sarah Gill, Associate, Farrer & Co

 

Main image courtesy of iStockPhoto.com