Historically, the terms ‘CSR’ (corporate social responsibility), ‘ESG’ (environmental, social, governance), and ‘sustainability’ have all been used, with many unaware of the acute differences between them.
We’ve seen the rise and fall of ‘CSR’ – it was useful to kick-start corporate sustainability, but now ‘sustainability’ is more commonly used as a like-for-like replacement. ‘ESG’ originated as a way to demonstrate compliance however it was often then used interchangeably, and use of the term was replaced with ‘sustainability’. But it’s making a resurgence – ‘ESG’ is back.
Google’s own search data for 2023 shows that within the search term ‘sustainability’, ‘sustainable finance’ is the highest rising topic and the highest rising number of related questions were on ‘ESRS’ (European Sustainability Reporting Standards) which are standards that define the rules of CSRD (Corporate Sustainability Reporting Directive).
Similarly, the highest number of rising queries within ‘ESG’ range from ‘sustainable business’ and ‘sustainable products’ to ‘JP Morgan’, ‘KPMG’, ‘EY’ and ‘BlackRock’. So, you can see why there’s a lot of confusion about the differences between ‘sustainability’ and ‘ESG’ when there’s crossover.
Sustainability – Refers to the ability to maintain or endure over the long term without causing harm to the environment, society or the economy, ideally improving it. It goes beyond financial considerations and is a holistic concept that incorporates environmental stewardship, social responsibility and economic viability.
ESG (environmental, social, governance) – Represents a set of criteria that investors and organisations use to evaluate a company’s performance and impact on three areas: environment, social and governance. It’s a measured assessment using benchmarks and metrics.
So, sustainability is a broader concept that encompasses environmental, social and governance considerations, whereas ESG specifically refers to a set of criteria within these three areas that are used to evaluate the performance and behaviour of companies. Think of ESG as a subset of sustainability practices, with many organisations that are committed to sustainability also using ESG criteria to assess their own performance and make informed decisions.
‘Sustainable Investing’ vs. ‘ESG Investing’?
Both terms share the common goal of integrating non-financial criteria into investment decisions, but there are some differences:
ESG investing – The goal is mainly to manage risks and enhance long-term returns. It’s main purpose is to provide stakeholders and investors with a framework to assess your company’s impact on society and the environment, as well as its corporate governance practices. Capital markets generally prefer ESG as the yardstick for making responsible investments, as it’s a mature and tangible.
Sustainable investing – The goal is mainly to create long-term value for both investors and society. It considers ESG factors but also the broader concept of sustainability. For example, investors will reject businesses dealing in armaments.
A combination of both should be used for best practice and is dependent on the requirements and needs of the stakeholders.
The future of sustainability and ESG
ESG therefore typically has a finance focus and an investment lens associated to it – one very much focused on risk. As such it’s overwhelmingly viewed as a compliance requirement, or a set of criteria that organisations are being judged on. And with many current and upcoming mandatory and voluntary requirements (e.g. CSRD, TCFD, ISO14001, ISSB, CDP, GRI), it’s hard not to see why.
However, there’s an ongoing slow shift from an obligation mindset to an opportunity mindset. ESG is now being considered as a label for a force in the marketplace, an external demand that exists in the market to support the overall goal of building long-term sustainable value. So your strategic challenge is to understand how your organisation should respond to this new demand, providing you with an opportunity to differentiate yourself from competitors.
Along with organisational maturity increasing, the maturity and knowledge of investors is also increasing, with more sophisticated requirements now being requested.
For example, investors don’t want to simply tick the box that you have a net zero commitment anymore, they want to sit down with senior leaders and understand the decision-making behind your commitment, what you’re investing to reach it, and what your pathway and interim milestones are. As the climate crisis deepens, the finance sector will play an even greater role, and to demonstrate this, 40% of the FTSE4Good Emerging Indices are banks.
Addressing both sustainability and ESG within your organisation
With ESG-linked funds the fastest growing sector of the funds market, and younger employees preferring to work for sustainable companies, there’s no question that both ESG and sustainability are important. Harnessing both in a complementary way could allow you to achieve your strategic vision (sustainability) whilst complying with legislation (ESG) and engaging in a mindset shift (ESG) to deliver increased sustainability value.
Whilst this is a growing shift, you can do the following now:
- Make sure you truly understand what your stakeholders want, need, and expect.
- Understand the impact that good governance has and make sure there are proper governance structures.
- Structure your approach to emerging and new trends – develop an approach to risk assessing them and decide whether they’re appropriate to you, rather than blindly committing to something through a lack of knowledge or because your competitors are. New commitments and targets set should help the long-term value of the company.
- Understand the impact that good and transparent data collection, management and reporting has – investors may start asking for more real-time and trustworthy data.
- Understand the value that sustainability reports have and that transparent progress to all stakeholders is provided in a clear and logical way annually.
If you’re looking for sustainability advice for your organisation, get in touch with us today.
