What is ESG?
The environment, social and governance (ESG) framework is used by investors to evaluate an organization’s performance against specific criteria. Such criteria is used to measure an entity’s risk exposure with the aim of improving investment decisions.
ESG gained traction following the publication of the 2005 report Who Cares Wins. This report demonstrated that ESG investments make good business sense. And since the report’s publication, such investments have grown exponentially.
For instance, it’s estimated that by 2025, 50% of all professionally managed investments in the United States will be ESG-mandated assets (according to the Deloitte Center for Financial Services).
Why is ESG important?
Yet, it’s not just investors driving ESG responsibility. Customers and employees are also demanding business with a purpose. As such, we’re seeing an ideological shift in the business realm where responsibility goes beyond the profit line. That is, a successful business is one that makes a profit while supporting and sustaining the environment and society.
Here we’ve given a brief introduction to ESG. For a more thorough understanding, we recommend you read our previous article ESG Reporting: What Is ESG Reporting and Why Is It Important?. Building on this, in this article we wanted to address a common misconception. That is, ESG can be used interchangeably with the term sustainability.
It’s important to understand the difference between ESG and sustainability, and the reporting of both, to accurately, transparently, and effectively communicate an organization’s green credentials to the relevant stakeholders. To help, in this Green Business Bureau article we explain the difference between ESG and sustainability reporting.
ESG and sustainability: Understanding the similarities
The term ESG seems to act as a synonym for sustainability, yet the interchangeable use of these two terms is incorrect.
Why is ESG used as a replacement for sustainability?
If you read our previous article ESG and Sustainability: Your 101 Guide for Understanding Corporate Sustainability, you’ll understand that the meaning of sustainability has become diluted over the years.
For some, sustainability denotes the preservation of our environment specifically, whereas, for others, the term is all-encompassing, encapsulating environmental and social responsibility.
Hence, there’s a need to adopt a more clear-cut definition, and ESG seems to have met that need.
Yet, it’s not correct to replace one term with another that has a different meaning. So what does sustainability mean, and how does it differ from ESG?
Corporate sustainability meaning
In business terms, sustainability is a balancing act of meeting the environmental, social, and economic needs relevant to the entity in question. That is, there are three pillars that denote corporate sustainability.
- The environmental pillar: Environmental sustainability is about meeting the needs of the environment. This means leaving natural ecosystems unharmed, supporting biodiversity, maintaining natural environments and resources, and restoring natural climatic cycles.
- The social pillar: Social sustainability is about meeting the needs of, and supporting communities, employees, consumers, and other stakeholders. This incorporates everything from philanthropic charitable donations, to establishing a healthy work-life balance for the employee.
- The economic pillar: Economic sustainability is about meeting the needs of the business itself. If a business is not profitable, it cannot operate.
By considering these three pillars together, the aim of corporate sustainability is to maintain an enterprise in the long-run without depleting the environment or adopting socially harmful practices.
Each category within ESG overlaps with the 3 pillars of corporate sustainability, as we explain:
- Environment: This includes corporate climate policies, energy use, waste, pollution, natural resource conservation, and the treatment of animals. The environment category addresses the environmental risks a company might face.
- Social: Social criteria look at a company’s relationships with stakeholders, which include employees, consumers, and investors. This considers philanthropic donations and working conditions for employees.
- Governance: Governance refers to how a company is managed, and how well the executive management and board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers. This includes transparent and full financial reports, plus ethical and legal management.
As you can tell, there’s an overlap between the three sustainability pillars and the three categories of ESG. And this is how the two terms are similar.
ESG and sustainability are both strategic considerations for businesses, executive teams, and investors. They both share the same goal of improving a company’s business practices to boost profits and win favor from investors, customers, and regulators – while safeguarding the environment and supporting communities.
By accounting for these similarities, it’s easy to see how the two terms can become confused. So what marks them as different?
ESG vs sustainability: Understanding the differences
“ESG looks at how the world impacts a company or investment, whereas sustainability focuses on how a company (or investment) impacts the world.” – Brightest, Defining ESG vs. Sustainability – What’s the Difference?
The main difference between ESG and sustainability is the stakeholders each address. ESG is a concept used by investors, giving them a framework to assess a company’s performance and risk. As an investment framework, standards have been set by lawmakers, investors, and ESG reporting organizations.
Sustainability, on the other hand, has a broader stakeholder focus, accounting for employees, customers, and shareholders. In contrast to ESG, sustainability standards incorporate scientific input.
ESG seeks the identification and ranking of undertakings that show desirable characteristics, which are broader than what’s considered in sustainability – these characteristics extend to directors’ pay, diversity of stakeholders, treatment of workers, community engagement, and health and safety issues (plus more).
The distinction between ESG and sustainability is subtle but important.
ESG criteria act as a shopping list that companies need to have on hand to attract responsible and ethical investments. These criteria are more specific and data-driven than the criteria used to assess an organization’s sustainability. This specificity might be the reason why ESG is becoming the preferred choice of phrase when thinking about purpose-driven businesses. That is, ESG is here to stay – just take a look at the stats for proof:
- According to McKinsey Research, an ESG strategy can boost operating profits by as much as 60%.
- 71% of CEOs believe it’s their responsibility to ensure the organization’s ESG policies reflect the values of their customers.
- Deloitte found that ESG-mandated assets could make up half of all professionally managed investments by 2024, which would total $35 trillion.
“ESG-oriented investing has experienced a meteoric rise… The acceleration has been driven by heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success. The magnitude of investment flow suggests that ESG is much more than a fad or a feel-good exercise” – McKinsey and Company, Five ways that ESG creates value
The transition from sustainability to ESG metrics shows the evolution of business practices to more accurate performance measurements. In this sense, change is good, as it indicates the maturation of business practices to a more precise measure of how a business impacts the environment and social systems.
It’s evident that going forwards, businesses will be expected to have high-quality and accurate ESG data, meaning they’ll have to collect timely, complete, accurate, and auditable data.
To showcase this data, corporations will need to produce an ESG report. Which brings us to our next question: What is the difference between an ESG and a sustainability report
ESG reporting: What is an ESG report and how does it differ from a sustainability report?
To invest effectively and responsibly, investors need ESG reports as these reports allow them to review reliable, accurate, comparable, and timely data.
An ESG report discloses environmental, social, and corporate governance data using specific criteria, with the aim of exposing an entity’s risk profile to investors.
Governance reporting is generally provided in an organization’s annual report. It’s standard for companies to provide a copy of their governance procedures and codes of ethics.
Environmental data is trickier to report as metrics are much more complex. New regulations are being developed in this field and with that, reporting standards may improve.
Social issues incorporate employee wellbeing, labor relations, and workplace health and safety. Companies have been slow to provide reliable and comparable data on social issues.
Understanding the difference between an ESG and a sustainability report
A sustainability report is a periodic report published by companies who want to share their corporate social and environmental responsibility to a broad range of stakeholders.
The report will synthesize and publicize the information an organization decides to communicate regarding its commitments and actions in social and environmental areas.
By doing so, an organization will let stakeholders – from customers to employees, and anyone else interested in the actions of the organization – know about the brand’s sustainable development strategy.
We already know the difference between ESG and sustainability, that is, ESG is a specific criterion set out by lawmakers, investors, and ESG reporting organizations. Sustainability, on the other hand, is an umbrella term for doing good for a broad range of stakeholders. This difference is reflected in the reporting. Although many standards used for ESG reporting can also be used to produce a sustainability report, the purpose and target audience of the reports differ. Plus, a sustainability report can be vague whereas an ESG report is strictly structured by environmental, social, and governance criteria.
What standards are used for ESG and sustainability reporting?
Companies need to know how to write a sustainability or ESG report, and therefore, you must understand the key reporting standards and guidelines that will provide accurate, consistent, and comparable data.
With this in mind, we’ve listed the main reporting standards and guidelines you should consider below:
- GRI: GRI has issued a series of guidelines for sustainable development reporting, that cover all aspects of the triple-bottom-line (people, planet, profit). With this approach, organizations are required to report their bottom-line impact in three categories, to give a comprehensive measure of their effect on the world, providing relevant ESG information.
- Sustainability Accounting Standards Board (SASB): The SASB focuses on providing financial substantive information primarily relevant to investors. Companies that produce comprehensive reports that include a range of financial and ESG data can use the SASB standards to identify and report financial materiality information for investors.
- Task Force on Climate-Related Financial Disclosures (TCFD): The Financial Stability Board (FSB) is an international institution responsible for the global financial system monitoring that established the TCFD. The TCFD recommends standards for climate-related disclosures to promote informed investment, credits, and insurance decisions.
- Climate Disclosure Standards Board (CDSB): The CDSB creates a framework that provides environmental information in mainstream reports such as the 10-K.
- International Organization for Standardization (ISO): ISO is an independent, non-governmental and international organization that provides 164 national standard bodies. Included in these bodies is ISO 14001, which provides specific standards for an environmental management system. ISO 14001 gives a framework organizations can follow to improve their environmental performance for reporting – information that supports an ESG report.
- Green Business Bureau (GBB): GBB’s EcoAssessment and EcoPlanner act as sustainability guides, providing green initiatives ordered by effort and cost which organizations can follow to support their performance from a sustainability and ESG standpoint. Initiatives achieved are transparently recorded in an organization’s EcoProfile, maintaining the information needed to produce an accurate sustainability and ESG report. Once more, organizations are certified for their efforts with GBB’s Green Seal.
The above standards, requirements, and frameworks support both sustainability and ESG reporting. One should not exclusively be used at the expense of another, rather organizations should select the frameworks best suited to their industry and reporting aims.
ESG and sustainability reporting improve overall company performance
ESG is becoming the new industry standard to communicate purpose-driven business. This is due to the specificity of ESG requirements making it a more comprehensive and precise measure that determines an organization’s performance on an environmental, social, and economic front.
ESG reporting and disclosures help companies gain access to capital markets and also secure their license to operate. Investors, but also other stakeholders such as customers and employees, seek brands that have a strong ESG performance.
Although the term ESG seems to be replacing sustainability, it’s important we understand the difference to differentiate the reporting of each. Such an understanding will improve related communications to enhance company transparency.
Yet, as well as understanding the differences, organizations must also understand the similarities between ESG and sustainability. Both are strategic frameworks used to boost business resilience and help improve overall company performance.