ESG and Sustainability: Your 101 Guide to Understanding Corporate Sustainability (2023)

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.

Green Business

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.

Sustainability Strategy

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.

Sustainability Program

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.

Sustainability Plan

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.

Sustainability Framework

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 sustainability

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.

ESG investing

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 Metrics

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.

ESG Policy

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 structure

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 report

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 certification

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.