Consumer Well-Being, Management, Sustainability, News
Kogod School of Business professor Jennifer Oetzel talks about the future of sustainability reporting.
Businesses are under increasing pressure to behave ethically—and to prove and showcase their socially-conscious actions. In addition to rising demand for greener products, consumers and investors are more interested than ever in responsible efforts from companies. You might have heard a few acronyms thrown around in relation to all this: Environmental, social, and governance (ESG) and corporate social responsibility (CSR). They’re both approaches for businesses to showcase their commitment to improve society, protect the environment, and behave ethically—but each framework has a different objective. CSR usually encompasses how a company will approach its internal framework of sustainability plans and responsible cultural influence, whereas ESG relates to the assessable outcome concerning a company’s overall sustainability performance. Investors typically look at this framework when making financial decisions regarding the company in question. We spoke with Kogod Professor Jennifer Oetzel about why these frameworks matter and the business implications of each one. Oetzel first echoes that there is a growing expectation that companies and organizations should take responsibility for their environmental and social performance as well as the quality of their corporate governance. “Companies that fail to address their ESG performance may increase business risk,” she said. “Vulnerability to natural disasters, for instance, can threaten a company’s financial performance and, in some cases, its survival.Why do CSR and ESG frameworks matter?
Companies that do not prepare for threats will have great costs and lower profitability.”
Jennifer Oetzel
Professor of Management, Kogod School of Business
Additionally, a growing number of investors are looking to invest their money in socially and environmentally responsible firms. In fact, 73 percent of investors state that efforts to improve the environment and society contribute to their investment decisions.
To meet that demand, investment banks must be able to measure and verify strong ESG performance.
Also, frameworks are essential for establishing a common understanding of which ESG issues are most salient across industries. When developing a CSR or ESG strategy, managers must identify the most salient factors for their industry, company, and key stakeholders.
“If a company ignores the most critical issues or only addresses issues seen as irrelevant, then they will lose support from stakeholders that care about ESG performance,” Oetzel said.
How do CSR and ESG fit together?
Efforts undertaken in a CSR strategy can be refined and fit into ESG metrics. CSR can also be excellent for driving awareness of initiatives, but ESG can provide solid metrics proving the efficacy of those initiatives. ESG has the advantage of being quantifiable, but CSR is helpful in developing a company culture that boosts a positive social impact and promotes an ethical image to consumers.
ESG’s footprint across is growing, too. More than 90 percent of S&P 500 companies now publish ESG reports—up from 53 percent in 2012—due in part to an increase in mandatory reporting standards. For example, the European Union's Corporate Sustainability Reporting Directive (CSRD) came into force in January 2023, creating new ESG reporting standards for some 50,000 companies starting in 2025.
“ESG metrics are popular because investors and other stakeholders need a common understanding of what factors are associated with strong environmental and social performance so that performance can be verified,” Oetzel said. “Without a way to verify performance, investors will not invest in ESG-related funds."
Stakeholders want to know whether companies care about the issues that are important to them.”
Jennifer Oetzel
Professor of Management, Kogod School of Business
What are some of the benefits and challenges of sustainability reporting?
These frameworks provide managers and investors with performance targets, but the downside is that most existing metrics are not yet standardized. “Managers are still learning how to assess non-financial performance, and for that reason, managers need a clear understanding of what they should be focusing on and what matters most,” Oetzel said.
Oetzel noted that clear standards also enable high performers to separate themselves from organizations engaged in greenwashing—those that don’t “walk the talk,” so to speak.
For example, the European Union has set a goal to reduce net greenhouse gas emissions by at least 55 percent by 2030 (compared to 1990) and seeks to be carbon neutral by 2050. “Companies that exceed the EU’s goals around carbon emissions may find it hard to enter or compete in the EU in the coming years,” Oetzel said. “Innovate or die may be the only way forward.”
Another downside of ESG assessment is that there are few common metrics for assessing different aspects of ESG performance. This is particularly true for social issues, the “S” in ESG. “What managers in one organization consider a socially responsible activity may be unimportant to others,” Oetzel explained. “CSR and social issues can be subjective.”
Another challenge is that financially high-performing companies may be undervalued in the market without third-party certification of corporate claims around social and environmental issues and a shared understanding of what is important for different companies. “This is a major concern for investment banks since it can reduce demand for ESG-related funds,” Oetzel said.
What is a sustainable path forward for businesses?
Rather than resisting pressure to adopt sustainable business practices, the most forward-looking companies will recognize the business opportunities of innovating around the best environmental and social practices. Doing so can push them to the top of their industry and enable them to attract the best talent.
“Depending upon a firm’s industry,” Oetzel says, “ignoring market pressures to become more sustainable can be an existential threat."
