Traditional perceptions of sustainability have been shifting. Once reserved only for the investor community, the three terms of environment (E), society (S) and governance (G) – together forming ESG – are rapidly becoming mainstream.
With a rise in ESG-oriented investment, organisations across the world are starting to face increased pressure to comply with and follow ESG strategies and policies. Driven by increased social, government, and consumer awareness and demand for sustainable, responsible, and ethical investment flows, organisations are warming up to the notion that strengthened ESG propositions can have a positive impact on long-term success.
The recent upswing of ESG-centric investment suggests it is more than a fad or a feel-good exercise. However, the term ‘ESG’ is often used interchangeably with ‘sustainability’. Is this accurate, or misleading? Are they one and the same? Or are they two entirely separate ideologies?
Below, I aim to differentiate the two terms as well as distinguish whether ESG strategies are simply sustainability strategies, rebranded.
Sustainability & ESG… What’s The Difference?
Sustainability encompasses a large variety of terms and activities which define a company’s ability to implement processes and actions that reduce their negative impact on the natural environment, promote social wellbeing, whilst still allowing for creation of wealth, growth and financial gain. Another factor of note is that sustainability has found credence within the C-suite in recent decades, with most organisations having adopted a serious approach towards sustainability which preaches an evolved maturity to either environmental or social sustainability.
ESG strategies, on the other hand, incorporate factors beyond just environmental and social influence, with Governance considerations also aiding company performance and productivity. Environmental is the most closely linked to the concept of sustainability, with a goal to improve a company’s environmental performance and Social examines how a company affects the wellbeing, engagement and diversity of its employees, customers, and community. Governance, however, is centred around a business’ authority, structure and ultimately accountability.
Furthermore, when it comes to disclosing and benchmarking data, there’s a remarkable difference between the two. Sustainability can often be quite broad. However, organisations that effectively adopt a more ESG centric approach tend to have a more specific set of measurable disclosures, metrics, and Key Performance Indicators (KPIs).
The Benefits of ESG
There can be numerous benefits of investing in the creation and execution of comprehensive ESG initiatives for businesses. A solid ESG proposal may assist in the creation of significant business value across the organisation by attracting more consumers, improving resource availability, initiating strategies to increase social credibility and community ties, and improving investor relations.
A well-rounded ESG strategy can safeguard a company’s long-term success making it a much more valuable resource, and this is clearly validated by data collected in several studies:
A McKinsey & Co report found that an effective ESG strategy can affect operating profits by as much as 60%.
As per EPFR’s recent report, SRI and ESG investments recorded inflows of $168.74 billion in 2020, up from $63.34 billion in 2019.
A meta-study evaluated the results of over 2000 individual analyses of ESG performance across asset classes and regions between 1970 and 2014. It found that nearly half showed a positive relationship between ESG and corporate financial performance, with only 11% finding a negative relationship.
Do Companies Need to Shift from Sustainability to ESG & How Can They Do It?
Organisations that are already following sustainability strategies should start looking into a shift to ESG. Change is viewed positively, and this shift would show progress and maturity of a business. Companies are also facing more discerning inquiries about their performance in these areas, now that ESG has become mainstream. Whilst most ESG disclosure is voluntary, stakeholders such as investors, communities, and customers tend to expect disclosure as they want ambitious goals to be met.
Despite this, shifting to ESG from sustainability can be a detailed and intricate process, especially since sustainability in ALL aspects (not just environmentally) is no longer solely the responsibility of sustainability experts, but of all other departments too, such as finance, procurement, real estate, operations, human resources, and technical teams. In essence, co-operation and participation across disciplines is necessary to develop ESG strategies and achieve success.
Organisations are also required to determine what ambitious ESG objectives entail for their business model, as well as their ‘importance’ to their sustainability reputation. ESG gives you a picture of where you want to go, but you can also set goals along the way. Existing sustainability policy badges must not be altered as they tend to fall under the ESG rubric and nowadays tend to have more quantitative measures such as carbon equivalents or energy intensity.
In essence, effective materiality, understanding, communication, integration, and accountability are the keys to successfully create a robust ESG strategy. These elements are essential for business continuity and the development of long-term resilience. Developing an ESG strategy and successfully following through with it is a challenging task, but the reward is a profitable company that may leave the world in a better position than when it began.
ESG Is Not Sustainability Rebranded
Although it may appear to be a semantic distinction, the ever-changing marketplace makes it critical to be able to differentiate ‘ESG’ and ‘Sustainability’ in order to focus on what counts. Sustainability is a catch-all phrase referring to any company’s attempts to ‘do better’ whereas ESG focuses on ‘your business’; both of which are vital to today’s C-suite and stakeholders.
Companies need to understand their ESG topics and must ensure they gather data that is timely, accurate, full, and auditable in order to understand their ESG impacts. With pressure mounting to become more sustainable and ESG aware, we will have more uniform standards and greater accountability which means our technique of collecting and tracking measurements to construct ESG management must enhance.
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This article was originally posted on the 25th January 2022 to our dedicated thought leadership platform WSP-Anticipate.com.