The definitions of “ESG” and “Sustainability” are changing, and it is critical to understand the distinction. In this article, we will discuss what ESG Vs. Sustainability is and why it is significant.
Even though ESG (Environment, Social, and Governance) was created for the investment community as a framework for companies to report on and be measured, the term has recently come to mean the same thing as “sustainability.” Let’s look at the history and meaning of both words, then talk about the confusion they’re causing.
The terms ESG and sustainability are increasingly being used interchangeably. This is sometimes acceptable. It can sometimes be perplexing.
What is ESG in Simple Terms?
At its core, ESG is both a corporate governance and an investment framework. Companies that follow ESG principles will define a vision, mission, strategy, tactics, and values that consider, measure and report on their company’s environmental, social, and governance aspects. Investors who use an ESG framework will consider its environmental, social, and governance attributes when deciding whether to invest in a company.
History of ESG
Since the beginning of the stock market and investing, or for more than a century, investors have often thought about how good a company was for the environment and society before they put money into it. United Nations’ Principles for Responsible Investment (PRI) report first used the acronym ESG in the Freshfield Report and “Who Cares Wins?” in 2006. ESG criteria have been incorporated into company financial evaluations. At the time, 63 investment firms comprised of asset owners, asset managers, and service providers signed an agreement with $6 trillion in assets under management that included ESG issues. Today, there are over 2500 signatories representing assets worth over $80 trillion. This emphasis on ESG is growing as major institutional investors and their clients make it clear that they expect companies in which they invest to commit firmly to ESG criteria and reporting.
Understanding ESG and Related Concepts
Understanding the various ESG terms and their context will assist us in understanding how the majority of people use and perceive ESG. Let’s look at a few examples of how the term “ESG” is used.
ESG Investment
As mentioned previously, ESG was developed by financial institutions for investment purposes. ESG investing or Impact investing arose from the growing assumption that environmental and social factors increasingly influence business financial performance. According to the theory, companies with higher ESG scores will perform better. Numerous studies have demonstrated this to be true.
ESG Metrics
Environmental, social, and governance (ESG) metrics assess a company’s exposure to various environmental, social, and governance risks. These are metrics for different ESG integration approaches, including benchmarking and scenario analysis.
They are similar to traditional financial analysis metrics; however, ESG metrics include non-financial data such as greenhouse gas emissions, waste reduction, water usage reduction, use of green energy, and the number of health and safety incidents per year.
ESG Framework
ESG frameworks are systems that standardize ESG metric reporting and disclosure. As NGOs and business groups adhere to these frameworks, the areas of focus and metrics recommended vary greatly.
The Global Reporting Initiative, for example, is a well-known ESG framework (GRI). GRI establishes standards for responsible environmental, social, economic, and governance behavior across various topics. Following an ESG framework, such as GRI, standardizes ESG assessment reporting.
Sustainability Reporting
ESG reporting is the disclosure of data — using ESG metrics — about a company’s operations in three areas: environment, social, and corporate governance. An ESG report provides investors with a snapshot of a company’s impact in these three areas.
Standardized reporting methods, such as GRI, are intended to summarise quantitative and qualitative information to facilitate disclosure and improve transparency when screening investments. ESG reporting assists investors in avoiding companies that may pose a higher financial risk due to their environmental performance or other social or government practices.
Sustainability Definition
Sustainability is closely related to ESG, but it is not the same.
The Oxford English Dictionary currently defines sustainability as “the property of being environmentally sustainable; the degree to which a process or enterprise can be maintained or continued while avoiding the long-term depletion of natural resources.” — University of Oxford.
According to Merriam-Webster, sustainable refers to or is a method of harvesting or using a resource so that the resource is not depleted or permanently damaged.
These original “dictionary” definitions focus on environmental protection and preserving scarce natural resources. The term “sustainability” has expanded beyond its original meaning to include social and governance responsibility. As a result, there needs more clarity with ESG, which we will address shortly.
The Sustainability definition: Expanded and Evolving
Wikipedia defines corporate sustainability in the business world as an approach that aims to create long-term stakeholder value by implementing a business strategy that focuses on the business’s ethical, social, environmental, cultural, and economic aspects. The strategies developed are intended to promote organizational longevity, transparency, and proper employee development.
Corporate sustainability extends far beyond environmental protection. In addition to environmental goals, a sustainable business has societal and economic goals. It is a business strategy that seeks to balance long-term growth and profit with protecting and caring for people and the environment. A corporate sustainability strategy will balance the needs of employees, customers, and society with the requirements of shareholders.
Understanding Sustainability and Related Terminology
The words “sustainable” and “sustainability” have been hijacked by the business community, resulting in a plethora of terms that use the words. We talk about sustainable energy, sustainable cities, sustainability programs, sustainability mission statements, and a sustainable economy, for example.
Strategy for Sustainability
A sustainability strategy is a prioritized set of actions focusing on investment and driving performance, resulting in long-term environmental, social, and economic systems. This entails developing a sustainability vision, mission, and values and outlining a clear set of sustainability statements, programs, plans, actions, and goals that outline how a company will compete in a specific market, or markets, sustainably.
Sustainability Program
Like any other corporate program, a sustainability program defines goals, initiatives, and projects to support a sustainability strategy. It usually consists of a program leader and a team who define an actionable roadmap for becoming more sustainable. This includes the organizational structure, specific initiatives, and implementation plans.
Sustainability Plan
A sustainability plan is a pre-planned course of action designed to achieve a specific goal from a sustainability program. A sustainability strategy establishes a broad set of goals and activities. These are then grouped into a sustainability program further subdivided into actionable sustainability plans. Understanding that a sustainability program will include more than one sustainable plan to achieve the overall sustainability strategy is critical.
Sustainable Development Framework
The three P’s of Sustainability are commonly used to categorize sustainability (People, Profit, Planet). These pillars are discussed further below.
The Environmental (or Planet) Pillar aims to reduce and eliminate greenhouse gas emissions while protecting the planet and its resources. It is all part of green energy, waste management, eliminating toxic hazards, reusing or recycling materials, and reducing carbon emissions throughout the supply and demand chains.
The Social (or People) Pillar is concerned with the business practices that promote people’s health, safety, and well-being, which includes all stakeholders in a company: employees, customers, partners, and local communities. It entails building diverse, equitable, inclusive, and just organizations. Employee welfare, fair wages, gender equality, and worker and customer safety are also included.
The Economic (or Profit) Pillar is concerned with a company’s financial viability, governance, and transparency. It considers what business models, policies, and practices businesses must implement to survive and thrive as an economic entity that creates jobs and economic opportunities for society.
ESG and Sustainability Confusion
When ESG and Sustainability are compared, the letters ESG map the three pillars of sustainability; as a result, the terms have recently been used interchangeably. In other words, ESG, previously referred to as an investment rating and framework, is now being used as a shorthand for corporate sustainability. For example, a company may state that it has formed an ESG team and program. This could refer to either a team focused on publicly reporting sustainability aspects or a team focused on driving the company to be more sustainable. It can mean both in many cases.
The ESG program encompasses both the strategy and initiatives for becoming more sustainable, as well as the strategy and initiatives for adequately measuring and reporting on sustainability outcomes.
When you hear the term “ESG” in a discussion or communication, it may make sense to clarify what the user meant. Is the context one of investment reporting and public disclosure or becoming more sustainable and improving your sustainability performance through an ESG framework? If the company is not publicly traded or on a stock exchange, it is equivalent to referring to its sustainability.
The word “sustainability” in a conversation or communication most likely refers to a company’s environmental responsibilities. However, this is only sometimes the case, and many businesses and individuals use a broader definition that includes all three pillars — environmental, social, and economic.
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