Over the past two decades we have seen many different terms used to explain these efforts on the intersection between business and the society such as corporate social responsibility, or corporate governance. Two common terms emerged: sustainability and ESG. Even among the business and environmental experts, many use the terms casually and interchangeably. But there is a difference between ESG and sustainability. It has become apparent that we need a common language to explain the overlap between the business and society, and cope with the implications of the shifting semantics.
The broader discussion among industry leaders began with sustainability, and for a few decades, sustainability has had the most staying power. This is possibly because the collective awareness has shifted to acknowledge the importance of societal, economic and governance factors for successfully tackling environmental challenges, beyond the initial narrow focus on ecological issues.
ESG has become the dominant acronym encompassing environmental, social, and governance efforts, possibly because of the capital markets and the investment community getting on board and the rapid rise in the so-called ‘ESG funds.’ The rapid growth of ESG investment funds is not without challenges due to a lack of standardization and precise definitions. Nonetheless, investment focus on ESG has led in the shift of focus from sustainability to ESG.
In essence, ESG and sustainability are similar, though ESG is more specific and measurable, and offers tangible criteria for the companies to measure and report their activities. Increasingly, sustainability is seen as a more of an umbrella term, whereas ESG is more specifically focused on environmental, social and governance rather than just ‘going green’ or ‘being socially responsible.’ Because ESG uses tangible metrics of success, it is also easier to prove its impact.
For example, McKinsey & Co suggest that good ESG strategies can contribute 60% to operating profits, while it is expected that ESG managed assets could total over half of all professional investments by 2025 according to Deloitte. Also, portfolios with good ESG scores tend to be more resilient long-term.
Sustainability, long seen as an effort of ‘doing well by doing good’, is seen as increasingly vague in today’s climate, or an overused substitute for ‘going green’ or the ‘triple bottom line’. However not everyone in the business and investment community is on board with ESG as the only meaningful rubric. For example, some argue that the acronym obscures the true purpose of sustainable efforts. Either way, when it comes to sustainability versus ESG, whichever one you choose, make sure also to choose a tangible measurement metric to measure and report on your initiatives accurately.
Without a doubt, investment in these initiatives has become a priority for the business and investment communities. Regulators too are increasingly mandating corporate practices around reporting on the impact of their operations on the planet and the society as a whole. But it is more than just compliance – environmental risks are creating real costs for business, while the stakeholders are imposing pressure on the investors, too. There are tangible business risks long term for the companies who are not adequately prepared. Undoubtedly, the move toward a carbon-free economy holds great potential, and companies who invest in clean technologies and practices do so with the aim of outperforming those that don’t.