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Charity Navigator is launching a new rating system to help better evaluate nonprofits

In an effort to expand the range of nonprofits its evaluates—and give donors more data to help direct their giving—the charity rating organization is launching a new, more detailed measurement tool called Encompass.

Charity Navigator is launching a new rating system to help better evaluate nonprofits
[Source Image: eugenesergeev/iStock]

Since March, as the pandemic has shattered the economy and the protests forced an examination of racial justice, Charity Navigator has seen a 200% year-over-year increase in donations to nonprofits made on its site. Now, as interest in giving continues to grow, the largest charity evaluator wants to make it even easier for donors to know how effective a nonprofit—big or small—is, and for nonprofits to share information about their work.

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Since 2001, Charity Navigator has given nonprofits a star rating (up to four stars) based on that charity’s tax forms, but that has limited what types of charities can be evaluated. “If you look at the current star system that we have, it requires seven years of annual tax filings, $1 million in annual revenue, and it restricts some of the focus areas and also where the money comes from,” says Michael Thatcher, Charity Navigator CEO.

Nonprofits focused on civil rights and diversity and inclusion nonprofits, for example, might not meet that criteria because they’re often younger than larger, well-established organizations. “Ten years ago, a lot of these issues were not at the same level of focus and energy we have today,” Thatcher says. With the new system, called Encompass, the site will only require three consecutive years of tax forms and no minimum in annual revenue (most have an annual revenue around $250,000), Charity Navigator can now look at smaller, local nonprofits that it has never evaluated before. With this tool, the site has increased its total number of rated nonprofits from around 9,000 to 160,000.

The Encompass Rating System gives nonprofits a score from 0-100, across four metrics: finance and accountability; impact and results; leadership and adaptability; and culture and community. The rating system is launching with the finance and accountability metric first, and the following areas will be rolled out over the next 18 to 24 months. (Encompass will not replace the Star Rating System, but live alongside it.)

Each of those metrics will have subdivisions; the finance and accountability category will cover how much a charity spends on program expenses as a percentage of its total expenses, an independent audit of its finance, a look at the board composition, a liabilities-to-assets percentage, and require a website listed on the nonprofit’s IRS 990 form. For each of the four broad metrics, a score of 75 or above indicates that a nonprofit is effective and transparent in that area.

Tax data will be part of these evaluations, but Charity Navigator is also collecting data from other organizations such as ImpactMatters, and data published by the nonprofits themselves. Thatcher hopes this incentivizes nonprofits to build up their digital footprints, because having more transparency as an organization could boost donations and help them be more effective in their work. “There’s a trust issue in this country between the donors and the nonprofits. There’s a desire to see where the money is going,” he says. “The focus of Charity Navigator is trying to change that dialogue to ‘show me what the money has done.’ If you think about your giving as an investment, you’re investing in social change, and you want to be able to see what that was.”

Thatcher says that the future of giving is data, and the future of charity evaluations is dynamic. These Encompass ratings will evolve and change over time as more data comes in and as a nonprofit’s performance changes. “Looking at things as a continuum is actually a really important part of [our] focus, and very hard to do when you’re taking a snapshot and issuing a rating,” he says. Nonprofits evolve as the world around them does. “If you go back 12 months, none of us could have imagined we’d be where we are today.”

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Thatcher hopes the Encompass Rating System gives donors more confidence in their giving, and helps nonprofits translate their work to the public—but just using the tool shouldn’t be the end of your philanthropy. “[Donors should] find a way to engage, so that you have your own direct connection with the organizations you choose to support,” he says. “We’re a tool kit to help people get going in that journey, but when you find an organization you care about, I encourage everyone to build a relationship, because that’s really where it becomes meaningful and change happens.”

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