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ESG vs. Sustainability

The meanings of the terms “ESG” and “Sustainability” are evolving and it’s important to understand the difference.

Although ESG (Environment, Social, and Governance) was coined for the investment community as a framework for companies to report on and be measured on, the term has recently become synonymous with the term “sustainability”.  Let’s take a look at the history and meaning of both terms and then discuss the confusion the terms are creating.

TL;DR -> ESG and Sustainability are starting to be used interchangeably. Sometimes this is OK.  Sometimes it causes confusion.

ESG Definition

ESG at its core is both a corporate governance framework and an investment framework. Companies that adopt ESG principles will define a vision, mission, strategy, tactics and values that consider, measure, and report the environmental, social, and governance aspects of their business.  Investors that use an ESG framework will consider a company’s environmental, social and governance attributes when deciding whether or not  to invest in a company. These investors will do their own research on the ESG aspects of a company or they turn to 3rd party ESG ratings from companies like

  • MSCI
  • Sustainalytics
  • Bloomberg
  • FTSE Russell
  • ISS 
  • CDP 
  • S&P Global
  • Moody

The History of ESG 

Since the beginning of the stock market and investing, in other words, for over a century, investors have often considered  how environmentally and socially responsible companies were before they invested. The acronym ESG was first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins.” ESG criteria became incorporated in the financial evaluations of companies. At that time, 63 investment companies composed of asset owners, asset managers and service providers signed with $6 trillion in assets under management incorporating ESG issues. Today there are over 2500 signatories representing over $80 trillion in assets.  This emphasis on ESG is increasingly growing as major institutional investors and their clients are making it clear they expect the companies they hold to commit strongly to ESG criteria and reporting.

Understanding ESG and Its Related Terms

Understanding the various ESG terms and the context of the terms will help us understand how the majority of people use and perceive ESG.  Let’s consider a few popular usages of “ESG”.

ESG Investing

As previously mentioned, ESG was developed by financial institutions with investment in mind. ESG investing is also known as impact investing. ESG investing is born from the growing assumption that the financial performance of businesses is increasingly affected by environmental and social factors. The theory is that companies with better ESG scores will perform better. There are numerous studies that have shown this to be the case.

ESG Metrics

ESG metrics are used to assess a company’s exposure to a range of environmental, social, and governance risks. These are metrics to be used for a range of ESG integration approaches, such as benchmarking and scenario analysis.

They are similar to metrics used in traditional financial analysis, however, ESG metrics incorporate non-financial data, such as the level of greenhouse gas emissions, amount of waste reduction, amount of 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 the reporting and disclosure of ESG metrics. These frameworks are put together by NGOs, business groups, and others meaning they vary widely regarding the areas of focus and the metrics recommended.

For instance, one commonly used ESG framework is the Global Reporting Initiative (GRI). GRI provides a set of standards for responsible environmental, social, economic, and governance conduct over a wide range of topics.

Following an ESG framework like GRI standardizes reporting for ESG assessments.

ESG Reporting

ESG reporting refers to the disclosure of data – using ESG metrics – that cover a company’s operations across the three areas: environment, social and corporate governance. An ESG report gives a snapshot of a business’s impact across these three areas for investors.

Standardized reporting methods, such as GRI, are designed to summarize quantitative and qualitative information, for easy disclosure and improved transparency to screen investments. ESG reporting helps investors avoid companies that may pose a greater financial risk due to their environmental performance or other social or government practices.

Sustainability Definition

Sustainability is a term that is closely related to ESG, but not exactly the same thing. 

The current definition of sustainability in the Oxford English Dictionary is: “The property of being environmentally sustainable; the degree to which a process or enterprise is able to be maintained or continued while avoiding the long-term depletion of natural resources.” – Oxford, How sustainable is sustainability?

Merriam-Webster definition of sustainable is: relating to, or being a method of harvesting or using a resource so that the resource is not depleted or permanently damaged.

These original “dictionary” definitions suggest a focus on protecting the environment and preserving scarce natural resources. In fact, “sustainability” now goes well beyond this original definition and often includes social responsibility and governance responsibility. Hence the confusion with ESG which we’ll discuss shortly. 

Expanded and Evolving Definition of Sustainability 

In the context of the business world, Wikipedia defines corporate sustainability as an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the ethical, social, environmental, cultural, and economic dimensions of doing business. The strategies created are intended to foster longevity, transparency, and proper employee development within business organizations.

Corporate sustainability goes well beyond just protecting the environment. A sustainable business is one that also has societal and economic goals in addition to environmental goals. It is a business strategy that balances long-term growth and profit with the protection of and caring about people and the planet.  A corporate sustainability strategy will balance purpose with profit and balance the needs of employees, customers and society with the needs of shareholders.

Understanding Sustainability and Its Related Terms

The words ”sustainable” and “sustainability” have in fact been hijacked by the business community which has led to a plethora of terms using the words. For example, we refer to sustainable energy; sustainable cities, sustainability programs, sustainability mission statements, and a sustainable economy.

Sustainability Strategy

A sustainability strategy is a prioritized set of actions that focus investment and drive performance, creating environmental, social, and economic systems that can be sustained long-term. This involves creating a sustainability vision, mission and values and detailing a clear set of sustainability statements, programs, plans, actions, and goals that outline how a business will compete in a particular market, or markets, sustainably.

Sustainability Program

A sustainability program is similar to a traditional corporate program that defines goals, initiatives, and projects to support a sustainability strategy. It typically includes a program leader and team which define an actionable roadmap to become more sustainable. This incorporates the organizational structure, well-defined initiatives, and specific implementation plans.

Sustainability Plan

A sustainability plan is a course of action, created in advance and designed to complete a given goal from a sustainability program. It includes a broad set of goals and actions are set by a sustainability strategy. These are then organized into a sustainability program and organized further into actionable sustainability plans. It’s important to understand that a sustainability program will contain more than one sustainable plan to achieve the overarching sustainability strategy.

Sustainability Framework 

Sustainability is commonly divided into three pillars, the 3 P’s of Sustainability (People, Profit, Planet).  These pillars are explained below.

  • The Environmental (or Planet) Pillar focuses on minimizing and eliminating greenhouse gas emissions and protecting the planet and its resources. It includes areas such as green energy, waste management, eliminating toxic hazards, reuse or recycling of materials, and reducing the carbon emissions throughout the supply and demand chains.
  • The Social (or People) Pillar focuses on business practices that promote the health, safety and well-being of people, including all stakeholders in a business: employees, customers, partners, and local communities. It includes  creating organizations that are diverse, equitable, inclusive and just. It also includes employee welfare, fair wages, gender equality, worker and customer safety.
  • The Economic (or Profit) Pillar focuses on the financial viability, governance and transparency of a business. It considers what business models, policies and practices businesses need to implement to survive and thrive as an economic entity that provides employment and economic opportunity for society.

ESG and Sustainability Confusion

When comparing ESG and Sustainability, it becomes clear that the letters ESG map almost exactly to the 3 pillars of sustainability. Hence the recent tendency to use the terms interchangeably. In other words, ESG which has been historically used to reference an investment rating and framework, is now being used as a shortcut acronym for corporate sustainability. For example, we might hear a company say we’ve put together an ESG team and program. This might refer to either a team focused on reporting sustainability aspects publicly or it may refer to a team focused on driving the company to be more sustainable.  In fact, in many cases, it means both.  The ESG program captures both the strategy and initiatives to become more sustainable as well as the strategy and initiatives to properly measure and report on sustainability results.

When you hear “ESG” being used in a discussion or communication, it might just make sense to get clarity on what the user meant. Is the context about investment reporting and public disclosure or is the context about becoming more sustainable and improving your sustainability performance using an ESG framework? If the company is not a public and not traded on a stock exchange, it is like referring to their sustainability. 

When you hear “Sustainability” being used in a discussion or communication, it’s likely related to a company’s environmental responsibility. But that is not always the case, and many companies and people use the more expansive meaning that includes all 3 pillars – environmental, social and economic. Again, simply ask the messenger what they mean… it’s a fair question.

Use the Green Business Bureau to support your ESG and Sustainability strategy

Here at Green Business Bureau (GBB) we focus on the E in ESG. Although as we evolve, we are adding aspects of social responsibility to our EcoAssessment and EcoPlanner tools.

Wether you call it your ESG strategy or your sustainability strategy, that “strategy” is all about meeting the environmental, social, and governance demands on a business.

For those companies that are public, you can use your ESG reporting to track your progress and set targets, but it can be difficult to translate these targets into actionable solutions. And this is where the Green Business Bureau can help. Think of the Green Business Bureau as an online database of sustainable initiatives. On signing up, organizations can access GBB’s EcoLibrary where they can choose sustainable solutions to support their ESG strategy and targets. We have many examples of public companies joining GBB and then seeing their ESG rating and scores improve by competing the suggesting green initiatives and certification. CyberArk raised their ESG rating a full letter grade.

For private companies and small businesses, Green Business Bureau membership is a great way to get serious about sustainability. It will force your company to come up with a plan, set goals and engage employees. The GBB EcoScorecard will track your progress and enable you to measure your results.

Many GBB initiatives focus on creating a green culture, mission, and values to embed sustainability into the core of an organization. From here, it’s easier for businesses to progress toward their ESG-related goals.

When a company is ready, they can certify their results. Businesses are awarded a Green Business seal, which can reach the Gold or Platinum level.  It’s a great way to be recognized from your accomplishments without greenwashing.

You can sign up for the Green Business Bureau here to create sustainable operations and devise an effective ESG or sustainability strategy.  Did you see what I did there? I used ESG and sustainability interchangeably. It’s OK. You know that I meant.

 

 

 

 

 

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