according to aKPMG Sustainability Report 2020 Survey, 80% of top companies now report on sustainability. In this report, the sustainability of a given company isMeasuredin 3 main areas:
- Biodiversity loss risk
- Reports on climate change and carbon reduction
- Report on the United NationsSustainable development goals
Thinking about these three focus areas, are they enough to infer whether an organization is sustainable or not?
This question highlights the problem with the use of the termsustainabilityIn business. It seems that the limits of what constitutescorporate sustainabilitythey are confusing, making it difficult to determine whether an organization's work should be promoted as sustainable or demoted to mere greenwashing. That is, the company uses exaggerated claims to position itself as sustainable.
According to another survey ofAdvanced Trends Report 2021/22, surveying 1,078 employees, 43% thought their company was guilty of greenwashing.
The absence of clear criteria meantsustainability, as a term, has been hijacked, watered down, and misunderstood. The continuous redefinition of sustainability has created an environment where people are not sure what it means and what to focus on.
For example, suddenly sustainability is about climate change, ending poverty and achieving gender equality.
This dilution of definitions means that organizations issue sustainability strategies, incentives and policies that may not be focused on the original object of sustainability. And the rules are simple:Sustainability means taking only what you need and letting the systems continue to exist.
What is ESG sustainability? The evolution of ESG
Earlier this year, a CNBC story announced that...
“There is no hotter area on Wall Street than ESG, with sustainability-focused funds topping $2 trillion.”–pipa stevens,CNBC market
In 2004, Kofi Annan, then UN Secretary, urged major financial institutions to partner with the UN and the International Finance Corporation. The goal was to identify ways to integrate environmental, social, and governance concerns into capital markets. The resulting 2005 study, titledwho cares wins, marked the first use of the term ESG.
ESG evolved fromcorporate sustainability. Financial institutions recognized the need forprotect our environmentand maintain high social morale for sustained financial success.
The main difference between ESG and sustainability is that ESG sets specific criteria to define environmental, social and governance systems as sustainable.
As we know, in a business context,sustainabilitycan mean different things to different entities and is applied as a general termdoing well. This translates into ethical and responsible business practices. Concerns for social equity and economic development are incorporated into this term.
ESG targets a specific set of criteria that removes ambiguity around the termsustainability. As such, ESG is a preferred term for investors.
Broader discussions in business began with sustainability, but have since evolved to include performance and ESG responsibility. ESG data helps identify risk-adjusted returns and highlights relevance to capital opportunities. ESG topics are interconnected and draw attention to the multifaceted risks of the social, technological, political, environmental and economic aspects of business.
Companies are using ESG criteria to mitigate business risk and prepare for the future.
Understanding corporate sustainability and its related terms
Sustainability has become a buzzword for climate change mitigation, social responsibility, and less plastic use.
For a better understanding of the word and what it means to be sustainable, let's consider some related terms within the context of sustainability. These are terms often and incorrectly used interchangeably.
corporate social responsibility
Corporate social responsibility (CSR) is a form of business regulation that guides companies to operate in a socially responsible manner. The main topics listed in the CSR include:
- Human rights:Support and protect human rights, ensuring that they are not complicit in abuses in their operations and seek to eliminate forms of forced labor.
- Fair Labor Practices:Promote equality and eliminate discrimination in employment.
- The environment:Assume responsibility for the environmental impacts of business.
- Fair Operating Practices:Comply with ethical business practices, including anti-corruption measures, reporting mechanisms, and responsible marketing.
- Consumer Issues:Extend responsibility to your supply chain and ensure that your suppliers, partners, distributors and other third parties abide by these principles.
- Community Participation and Development:Embrace transparency and report company progress on corporate social responsibility issues.
The termverdesit is widely used when thinking about corporate sustainability. Green is implemented as a prefix for projects, actions, programs or products that consider environmental protection. However, the excessive use of the term has diluted its meaning, to the point that it has become almostwithout sense.
Like a color of vegetation,verdesIt is often used for branding purposes to project an earthy tone that gives a product or service a sustainability-related appeal. However, this is a brand tactic that is sometimes implied as greenwashing.
Asustainability strategyit is a prioritized set of actions that focus investment and drive performance, creating environmental, social and economic systems that can be sustained over the long term. Sustainable development is incorporated into a company's short, medium and long-term strategic plans.
This involves detailing a clear set of sustainability criteria.statements, programs, plans, actions and goals that describe how a company will compete in a particular market or markets, in a sustainable manner.
Asustainability programIt is part of its sustainability strategy. This is an actionable roadmap that reports on the measures and related activities that drive results and tell your sustainability story. This incorporates the organizational structure, well-defined initiatives, and specific implementation plans.
To be effective, sustainability programs must approach their sustainability strategy as a continuum. Both your strategy and your program need room to grow, adjust, and evolve organically. After all, the economic, environmental and social needs of a company are constantly changing.
A sustainability program is based on broad sustainability goals and objectives to coordinate various projects and plans.
Asustainability planit is a course of action, created in advance and designed to achieve a particular goal of a sustainability program.
A sustainability strategy defines a broad set of goals and actions. These are then organized into a sustainability program and then organized into actionable sustainability plans.
It is important to understand that a sustainability program will contain more than one sustainability plan to achieve the overall sustainability strategy.
Asustainability frameworkit is the essential support structure for sustainability. A framework for corporate sustainability was first outlined in the early 1970s in the publicationthe limits of growth.
This publication defined three pillars of business sustainability: economic, environmental and social pillars.
- Pillar 1, the environment:Businesses must support, protect and not harm the environment.
- Pillar 2, society:Businesses must manage relationships with stakeholders and support communities.
- Pillar 3, in economy:Companies must meet their financial obligations to shareholders and be economically viable.
By meeting the needs of others, the sustainability framework is supported and a company achieves long-term corporate success.
economic sustainabilityrefers to indefinite economic output to support the long-term prosperity of the business without negatively affecting the social and environmental aspects of a business.
It is counterproductive for companies to strive for economic sustainability and keep pushing for continued GDP growth. GDP growth cannot occur indefinitely as it is limited by the limits of our planet and our society. Instead, organizations must be economically viable, but not seek indefinite growth, since this is not sustainable.
Understanding ESG and its related terms
ESG differs from sustainability in that ESG defines more specific criteria regarding scope, benchmarking, and data disclosure. For a better understanding of ESG, let's consider the other terms incorporated in the ESG context.
As mentioned above, ESG was developed by financial institutions with an investment focus. ESG investing is also known asimpact investing.ESG investingIt arises from the growing assumption that the financial performance of companies is increasingly affected by environmental and social factors.
ESG is the preferred term for the capital markets to make responsible investments. TO2020 Trend Reportby the US Forum for Sustainable and Responsible Investing noted that total ESG investment assets under management reached $1.71 trillion, an increase of 42% from 2018.33%of all US assets under professional management are tied to ESG-related investments.
The main catalyst for this increase in ESG investing is companies that score high on ESG criteria and outperform their counterparts. For example, the performance of the shares of ESG companies has less volatility (28.67% lower) and a positive effect on equity with a return of6,12%.
ESG MetricsThey are used to assess a company's exposure to a variety of environmental, social, and corporate governance risks. These are metrics that can be used for a variety of ESG integration approaches, such as benchmarking and scenarios.analysis.
However, similar to the metrics used in traditional financial analysis, ESG metrics incorporate non-financial data, such as the level of greenhouse gas emissions and the number of health and safety incidents per year.
For example, consider the biopharmaceutical companyAstraZenecaas an example. if we lookAstraZeneca Sustainability Report 2020, reported the following ESG metrics:
- Greenhouse gas emission metrics:With a 60% reduction in scope 1 and scope 3 GHG since 2015.
- Waste:With a 2% reduction in waste since 2015.
- Employee Health and Safety:with 89% ofemployeesfeeling that AstraZeneca is a great place to work.
- Compliance Governance:49.1 incidents of non-compliance with the Code of Ethics for every thousand employees in the commercial business units.
This example provides a snapshot of what ESG metrics reporting looks like. Investors look at this information to figure out where a company stands relative to its ESG performance.
A policy is a course or principles of action adopted or proposed by a company. OneESG policyis responsible for ESG-specific legislation and guidelines. To write an ESG policy, organizations must:
- Review the fundamental principles and values of the business.
- Be familiar with industry-relevant and ESG-specific legislation and guidance.
- Understand the language and terminology used for responsible investment and management.
- Understand regional and international standards related to ESG
ESG structuresthey are systems that standardize the reporting and disclosure of ESG metrics. These frameworks are designed by NGOs, business groups, and others, which means they vary widely in focus areas and recommended metrics.
For example, a commonly used ESG framework is theglobal information initiative(GRI). The GRI provides a set of standards for responsible environmental, social, economic and governance conduct on a wide range of topics.
Following an ESG framework like the GRI standardizes reporting for ESG assessments.
ESG reportingrefers to the disclosure of data, using ESG metrics, covering a company's operations in three areas: environment, social and corporate governance. An ESG report provides an overview of a company's impact in these three areas for investors.
Standardized reporting methods like GRI are designed to summarize quantitative and qualitative information for easier disclosure and greater transparency in evaluating investments. ESG reporting helps investors avoid companies that may pose greater financial risk due to their environmental performance or other social or governance aspects.practices.
ESG certificationinvolves an audit to assess ESG risks. These audits use selected environmental, social and governance criteriaCertificationESG standards and frameworks.
ESG metrics are compared to benchmarks defined by the evaluator. The goal is to determine where a company stands in relation to its ESG performance, as well as identify related risks. Certification validates a company's efforts to improve ESG performance.
Organizations will look to third-party sustainability assessments to improve their ESG performance. For example, partnering with the Green Business Bureau to use GBBsustainability assessmentit is reported to drive a company's ESG performance. The GBB allows organizations to assess their current performance against defined sustainability criteria, which means that organizations can identify opportunities and create strategies to improve ESG performance.
ESG and Sustainability: two different terms, but with the same objective
The goal of corporate ESG and sustainability is simple: create businesses that take only what they need, while leaving economic, environmental and social systems capable of an indefinite existence.
To achieve this goal, a thorough understanding of ESG and sustainability (as well as their related terms) is vital. Without that understanding, companies are blindsided.
To read more about the terms "ESG" and "Sustainability" and how they are related but slightly different, check out this article that compares the terms in more detail:ESG x Sustainability: what's the difference?
Use this article as your reference point for ESG and sustainability terminology. By understanding the details, we can create better businesses for a better future.
What is the difference between ESG and corporate sustainability? ›
ESG is based on standards set by lawmakers, investors, and ESG reporting organizations (e.g., GRI, TCFD, MSCI), whereas sustainability standards — while also set by standards groups like GHG Protocol — are more science-based and standardized.What are the 3 pillars ESG of sustainability? ›
Sustainability's three main pillars represent the environment, social responsibility, and the economic. (These three pillars are also informally referred to as people, planet, purpose, and profits.)What is a good ESG question? ›
1. Is ESG undermining your company's competitiveness? Fears that excessive emphasis on ESG could harm a company's competitiveness are not misplaced. In fact, there are valid questions about whether, if a company places too much energy into ESG objectives, it risks losing its focus on growth, market share, and profits.What is sustainability and ESG? ›
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.
ESG is a framework for conscious consumerism. It helps businesses attract investors, build customer loyalty, improve financial performance and make business operations sustainable.How does ESG impact corporate performance? ›
ESG investing appears to provide downside protection, especially during a social or economic crisis. Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.What are the 5 areas of sustainability? ›
In analysing those linkages, the 17 Sustainable Development Goals have been divided into five broad areas: social development, economic development, environmental sustainability, peaceful, just and inclusive societies, and partnership.What are the 5 factors of sustainability? ›
Sustainability can therefore be defined by five key factors: socio-cultural respect, community participation, political cohesion, economic sustainability, and environmental sustainability ( Table 2).How do you explain ESG? ›
Environmental, social and governance (ESG) is a term used to represent an organization's corporate financial interests that focus mainly on sustainable and ethical impacts. Capital markets use ESG to evaluate organizations and determine future financial performance.What are main ESG issues? ›
Environmental issues may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. ESG considerations can also help evaluate any environmental risks a company might face and how the company is managing those risks.
What is the most important in ESG? ›
Importance of ESG
For the social part of ESG, employees and shareholders are created equally, and their health and safety are considered. It helps avoid bad business practices. It also forces companies to innovate, which not only uncovers different opportunities but can open up more jobs.
ESG frameworks are important to sustainable investing because they can help individuals or other corporations determine whether the company is in alignment with their values, as well as analyze the ultimate worth of a company for their purposes.What are examples of ESG? ›
- Carbon emissions.
- Air and water pollution.
- Green energy initiatives.
- Waste management.
- Water usage.
The main difference between ESG and sustainability is that ESG sets specific criteria to define environmental, social, and governance systems as sustainable. As we know, in a business context, sustainability may mean different things to different entities and is applied as an umbrella term of doing good.How does ESG impact companies? ›
ESG can have a positive impact on brand reputation through increased trust, appeal and loyalty among consumers, which creates opportunities for improved market share. Sustainable business practices play a major role in reducing greenhouse gas emissions, conserving resources, and preventing pollution.Why is ESG more important now than ever for your business? ›
There are a number of reasons why ESG is more important now than ever before. Firstly, the world is facing a number of environmental challenges, such as climate change, which need to be addressed urgently. Secondly, there is an increasing awareness of the importance of social issues such as inequality and human rights.How does ESG impact business? ›
ESG refers to a broad set of considerations that may impact a company's performance and its ability to execute its business strategy and create long-term value. Socially conscious stakeholders use ESG to measure the sustainability and societal impact of a company and its business activities.Why is ESG important for employees? ›
Training on ESG provides a critical understanding of relevant environmental, social, and governance issues that affect the business. This understanding enables employees to contribute to their respective activities and build buy-in for the firm's strategy.How does ESG create value for companies? ›
Cost reductions ESG can also reduce costs substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.What are ESG targets for companies? ›
What are ESG goals? Environmental, social and governance goals are objectives set within a business to help the organization effectively manage its impact on society and the environment.
What are the 7 Rs of sustainability? ›
Getting started with the 7Rs: Rethink, Refuse, Reduce, Reuse, Repair, Regift, Recycle.What are the 3 main dimensions of sustainability? ›
The 2030 Agenda commits the global community to “achieving sustainable development in its three dimensions—economic, social and environmental—in a balanced and integrated manner”.What are 3 major factors that influence sustainability? ›
Sustainability is a very broad term that some feel, is massively overused, and sometimes in the wrong way. We're going to break it down into 4 clear and understandable aspects; human, social, economic and environmental.What is an example of corporate sustainability? ›
For example: Companies can reduce their resource extraction by using recycled or repurposed products and make their operations more efficient by reducing waste. In doing so, they contribute to the 'circular economy.What are the four C's of sustainable development? ›
As I think about the sustainability challenge, I look at it broken down into 4 “C's”: Collaboration, Control, Communication and Commitment.What are the 4 root causes of sustainability? ›
- Social Responsibility.
- Climate Change.
Key Takeaways. Sustainability is ability to maintain or support a process over time. Sustainability is often broken into three core concepts: economic, environmental, and social. Many businesses and governments have committed to sustainable goals, such as reducing their environmental footprints and conserving resources ...What are the 8 challenges to sustainability? ›
- #1: Climate Change. ...
- #2: Natural Resource Use. ...
- #3: Waste Production. ...
- #4: Water Pollution. ...
- #5: Deforestation. ...
- #6: Overfishing. ...
- #7: Ocean Acidification. ...
- #8: Air Pollution.
ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day to day activities.What are the five 5 ways that ESG creates value? ›
- What's Good for the Environment is Good for Business. ...
- Energy Independence. ...
- Cost Reductions and Financial Incentives. ...
- ESG Enables a Powerful Return on Investment. ...
- A Strong ESG Proposition Boosts Public Relations.
What are the biggest ESG risks? ›
- Social Impact of Products and Services.
- Human Capital and Human Rights.
- Product Governance.
- Data Privacy and Security.
- Occupational Health and Safety.
- Community Relations.
- Access to Basic Services.
- Oil and Gas.
- Retail and apparel.
- Technology, media, and telecoms.
- Travel and tourism.
- Establish Goals. ...
- Assess Opportunities for ESG Compliance. ...
- Create a Budget. ...
- Build an ESG Framework and Roadmap. ...
- Gather a Sustainability Guidance Team. ...
- Keep Tabs on Progress. ...
- Promote ESG Compliance.
Corporate sustainability is 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.What is the difference between sustainability and corporate sustainability? ›
A sustainable business is one that works in step with societal and environmental goals, rather than at odds with them. Corporate sustainability is a business strategy for long-term growth that works in harmony with people and the planet.What is ESG vs CSV? ›
ESG = Environment, Social and Governance, is where a company is accountable for looking beyond profit maximisation, and analyses the impact of its business on these 3 factors. CSV = Creating Shared Value, is where a company believes in “doing well by doing good”.Is corporate sustainability the same as CSR? ›
CSR often targets opinion formers such as the media, politicians, and pressure groups, and focuses on balancing current stakeholder interests. Corporate sustainability takes a more holistic approach, considering the social impacts from business alongside the environment and economy.What are the 3 elements of corporate sustainability? ›
The three pillars of corporate sustainability are the Environmental Pillar, the Social Pillar, and the Economic Pillar.What are the four pillars of corporate sustainability? ›
Introducing the four pillars of sustainability; Human, Social, Economic and Environmental.What are the 4 types of sustainability? ›
There are four dimensions to sustainable development – society, environment, culture and economy – which are intertwined, not separate. Sustainability is a paradigm for thinking about the future in which environmental, societal and economic considerations are balanced in the pursuit of an improved quality of life.
What is an example of corporate sustainability strategy? ›
Some companies take small steps to reach a sustainable goal, such as working to switch their production to use entirely renewable energy within a five-year time frame. Other companies take actions that can be implemented immediately, such as switching their packaging to use only recyclable materials.Is ESG the same as ethical? ›
The theory is that companies that don't impact the environment, have a social conscience and are well governed will out-perform other companies. That's a significant difference between ESG investment and ethical investment, which focuses more on moral and ethical judgements than investment considerations.What are the different types of ESG? ›
We have identified five primary strategies of ESG investing — exclusionary screening, positive screening, ESG integration, impact investing and active ownership.
The environmental component of ESG investing looks at how a company impacts the environment. Do they take steps to reduce or offset their carbon footprint? Companies can meet environmental ESG criteria either by limiting their negative impact on the environment or by having a positive impact on the environment.