These two terms are very different but also very much interlinked.
We read these terms on almost a daily basis, but are we all using them in the same way? And how do we determine which is most effective and appropriate to use?
ESG: focuses on evaluating the performance of companies based on environmental, social, and governance factors
Sustainability: is a broader principle that encompasses responsible and ethical business practices in a holistic manner
ESG is:
used to evaluate a company’s environmental, social, and governance impact
a quantifiable assessment of sustainability and business practices in these three areas
a framework that enables investors and other stakeholders to assess a company’s impact on society and the environment, as well as its corporate governance practices
in best practice, and as recommended by GRI, a way of looking at a company’s impacts on the external world as well as the external risks to the company
linked to structured reporting frameworks and standards (i.e. TCFD, ISSB, SASB) that include various metrics and disclosures for a company to describe and quantify the impacts of their business
Sustainability is:
a broader principle that promotes responsible and ethical business practices by considering the interplay of environmental, social, and economic factors
a complex, systemic concept that encompasses all of a company’s efforts to minimise its negative impacts on the world
often associated with the “triple bottom line” of people, planet, profit
Which do we use?
At sustain:able we tend to more commonly use the term ‘ESG’ when working on a company strategy and looking at their data.
We always advocate using Double Materiality and Dynamic Materiality when supporting a company in formulating their ESG strategy.
“Materiality has long been a concept in financial disclosures, de-marking which pieces of information are important enough to impact on an investor’s decision making.”
“Double materiality extends this coverage to include the organisation’s impact on the world, typically across its own operations and supply chain.”
“Dynamic materiality refers to taking a dynamic approach to monitoring how those topics that are important to a company are changing and adjusting business practices appropriately.”
We see ESG practices as part of a broader sustainability objective – a specific set of tools that can be used to measure the current performance of a company, and identify key areas to develop a plan for improvement. ESG metrics can be used to evaluate a company performance in specific areas i.e. carbon emissions, waste management, diversity and inclusion, and health and safety.
While the term ‘sustainability’ is an excellent broad term, it lacks specificity to really focus the work that needs to be done and build and implement an impactful strategy for a company.
The UN defines sustainability as:
“Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”
This is a definition we feel very much underpins how we see our role at sustain:able; helping to make companies that provide essential services and provisions as respectful of their impacts and of future generations as they can be.
What about CSR?
Corporate Social Responsibility (CSR) used to be the most commonly used term within many companies. CSR is a self-regulating business model that aims to improve society and the environment.
Compared to ESG it is much more general and can vary widely in terms of its implementation.
Companies tend to utilise CSR when discussing social outreach programmes, general environmental activities and community stakeholder interactions and support.
CSR has mainly now been incorporated into the wider ESG and sustainability discussions and is less common as a standalone topic.
ESG for investing v ESG for companies
The term ESG has a different meaning again when used purely in an investment sense.
Financial and ratings institutions are seeking to understand how a company’s financial position is affected by externalities, but does not address the impact a company’s activities have on the world.
Another commonly used term, ‘ESG investing’, is utilised to describe a method of investing “sustainably” whereby decisions on what to invest in are made while considering the full ESG spectrum – environment, social and governance – as well the economy. This often stems from a belief that those organisations with enhanced ESG credentials and lower negative impacts, will have a greater chance of financial success.
However, there is a lot of criticism of ESG ratings and the performance of “responsible investments”, challenging the assertion that the performance of different companies across the complex spectrum of ESG topics can be adequately represented in this manner. This has recently led to a “backlash against ESG” and debate about “abandoning the term ESG” in relating to investments (as an example, this article describes Larry Fink's opinion on the use of the term ESG).
Whilst this use of the term ESG is linked to the manner in which we use ESG when discussing impact and risk with companies, the use, approach and types of discussions around this are very different. It is therefore very important to recognise how the term ESG is being used – in an investment sense, or as a wider framework for addressing a business’ environmental, social and governance impacts.
Summary
ESG is very investor led, provides measurable targets and should enable a way of comparing how companies are tracking with regards to their environmental, social and governance impacts. We like this, as it provides a way of breaking down a large complex topic and helping communicate goals, strategy and progress.
But….ESG without sustainability is missing a very large part of the discussion; just looking at impacts today, related to today’s stakeholders, does not pay enough attention to future generations.
The pressure on all companies, across all sectors and industries, to reduce negative impacts and improve how they contribute to society, will only continue to increase.
Whatever it is called – ESG, sustainability, corporate social responsibility – most companies can and should be improving their performance across the wide range of ESG topics - in order to maintain their social license to operate, and build towards a better future for the generations to come.
So for now, let’s keep using these terms together, but always being mindful of their different purpose, focus, origin, strengths and weaknesses.
References
Comments