The growing interest in ESG, corporate responsibility and sustainability has resulted in the appearance of many different terms trying to describe interconnected and parallel concepts. Understanding these terms is essential for organisations that want to make informed decisions about their impact on the environment and society. ESG, sustainability, and CSR are three terms that are often used interchangeably but are, in fact, distinct from one another. In this article, we will explain each term, highlight key differences, and discuss their relationship and impact.
What is ESG?
ESG stands for Environmental, Social, and Governance. It most commonly refers to a quantifiable assessment of an organisation’s activities in each of these areas. ESG performance metrics are often used by investors and rating agencies to evaluate the strategies of businesses in managing the risks and opportunities associated with ESG factors.
Environmental factors include a company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and its attitude and actions around climate change issues. Other possible environmental issues include raw material sourcing (e.g., whether the company uses fair trade suppliers and organic ingredients) and whether a company follows biodiversity practices on land it owns or controls.
Social factors cover a vast range of potential issues including diversity, employee benefits and human rights. There are many separate social aspects of ESG, but all of them are essentially about social relationships. One of the key relationships for a company, from the point of view of many socially responsible investors, is its relationship with its employees.
Governance, in the context of ESG, is essentially about how a company is managed by those in the top-floor executive offices. How well do executive management and the board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers? Does the company have ethical standards, shareholder rights and strong Board governance?
What is Sustainability?
Sustainability refers to meeting the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable companies seek to create long-term value while minimising negative impacts on the environment and society. They strive to balance economic growth, social progress, and environmental responsibility.
ESG vs Sustainability
These terms are often used interchangeably. But what is the difference between them when sustainability and ESG professionals are talking about it? The following definitions come from MIT:
ESG: “... is focused on screening companies for investments, largely by understanding how a business is affected by environment and social issues (with an additional focus on whether a company has good governance in place to manage those risks and pressures).”
Sustainability: “… is a much broader idea, focusing on a company’s role in society, how it creates value by managing its environmental and social impacts (both positive and negative), and how its actions affect a long range of stakeholders.”
What is CSR?
CSR stands for Corporate Social Responsibility. It refers to a company's responsibility to be socially accountable to its stakeholders. CSR encompasses a wide range of qualitative activities, including philanthropy, volunteerism, and ethical business practices which may or may not be quantified by a business.
The European Commission has defined CSR as the responsibility of enterprises for their impact on society and, therefore, it should be company-led. Companies can become socially responsible by:
- integrating social, environmental, ethical, consumer, and human rights concerns into their business strategy and operations
- following the law
Public authorities play a supporting role through voluntary policy measures and, where necessary, complementary regulation.
The main difference between ESG, Sustainability & CSR
ESG, sustainability, and CSR are interrelated concepts, but they have distinct differences.
CSR is a qualitative, self-regulated approach that is not directly related to financial performance and business valuation. It is implemented through corporate culture, values, and brand management and aims to provide a broader benefit to society.
ESG is a quantitative, externally regulated approach that is directly related to financial performance and business valuation. It is implemented through measurable goals and audits and influences investors' decisions.
Sustainability combines both qualitative and quantitative approaches, is both self and externally regulated and is usually related to financial performance and business valuation. It is implemented through a combination of CSR and ESG practices, and it aims to achieve resilient business operations and growth over the long term.
Understanding the differences between these concepts is important for businesses to adopt practices that can benefit both the environment and society while creating long-term value for their stakeholders.
Incorporating ESG, Sustainability, and CSR Practices
Incorporating ESG, sustainability, and CSR practices is essential for companies looking to make a positive impact on society and the environment while creating long-term value for stakeholders. Sustainability is a broader concept that focuses on a company's role in society and managing its environmental and social impacts. CSR is a more defined term, but as ESG reporting becomes more mandated globally, it is increasingly being less used by businesses. ESG provides a more structured approach to reporting, with specific metrics and actual impact on a company's financial report taking centre stage. However, it is the act of being sustainable that is driving organisations to implement change. Finding the right approach and tools can take time - If you would like to find out how Greenstone could support you on your reporting journey, please talk to us.