The word sustainability and ESG are often used interchangeably and are interlinked – so much so that there is sometimes confusion around where one ends and the other begins. The truth is sustainability is a factor across all three pillars of ESG (not just environmental as some would believe) and there are some key differences between what we often think of as sustainability and ESG that you should be aware of.
What is ESG?
ESG (Environment, Social, Governance) are factors for organisations to consider, measure and report on to track performance and allow internal and external shareholders better visibility. The information can be used to attract investors and create a clear business strategy (among other things).
The Three Pillars
Environmental
The main focus here is on the impact a company is having on the natural environment. This includes things like environmental impact from carbon and other greenhouse gas emissions, water pollution, deforestation, waste management and how well an organisation complies with any environmental regulations within its sector and geographical area.
Social
The social pillar covers important areas across human rights, labour standards, employee engagement, diversity and inclusion, customer satisfaction and even factors like the wider impact on the community that an organisation has.
Governance
This looks at an organisation’s management and leadership structure. Issues like corporate ownership, board diversity, bribery and corruption policies, risk management and shareholder and stakeholder information.
ESG vs Sustainability
When you think of ‘sustainability’ your first thought might be around the environment, going green or aiming for Net Zero. In many ways you’d be right, sustainability does go hand in hand with environmental practices. However, especially in a business sense, a broader view is needed.
Sustainability can be seen as a blanket term for everything a company does to reduce its impact on the world around it – not just the environment. That could be promoting diversity in its leadership teams, having strong community outreach programmes or industry-leading labour standards in addition to its impact on the natural environment.
This notion of sustainability, as noble as it may be, has never been fully integrated into businesses because it’s too vague and too broad a subject matter that’s open to interpretation. So many companies have struggled to pin down exactly what sustainability means, how to report on it and how to use it to make improvements. That’s the main difference between ESG and sustainability.
ESG has taken over from the pre-existing notion of sustainability, laying down specific frameworks and standards that can be applied across all of its pillars, allowing organisations to report on a host of metrics (that include sustainability practices) across all elements of their business. This can then be used to inform policy making, drive the business forward, attract investors and customers and improve the operations of the business and its entire supply chain.
Sustainability does, of course, apply to natural resources and so ties in heavily with the environmental pillar of ESG but it’s also applicable to the social and governance pillars listed above. So, for an organisation to be truly sustainable, they need to be succeeding across all three pillars.
A holistic view of sustainability
There is a common misconception that companies who focus on sustainability in terms of the environmental pillar of ESG will score well with ESG ratings. Although this can often be the case we need only look at Tesla’s removal from the S&P 500 Index due to poor governance and humanitarian ratings to see that isn’t the case.
It works both ways; imagine a company performing well in diversity, corporate policies and risk management who are turning a healthy net profit. They would seemingly be a good choice for investors and their score across the social and governance elements of ESG reporting would likely be very healthy.
However, if they are pumping toxic gas into the environment and dumping hazardous waste then their environmental score will be low and any potential investors viewing this organisation through an ESG lens would soon see that they are not a good investment choice.
While sustainability is a vague concept that’s open to interpretation, ESG lays down clear parameters that allow organisations to report on tangible metrics. Reporting on all three of the pillars of ESG while maintaining a focus on sustainable practices will enable companies to improve their overall strategy for long-term growth.
Are you looking to take the next step in your ESG journey? Our expert team of advisors can help you every step of the way. From analysing frameworks and helping you outline goals to using our intuitive technology platform, Sustainion, to aggregate and make sense of data, we have all of your ESG needs covered. Contact our team to find out more.