As the fields of ESG, sustainability, and impact continue to grow and change, many have questions about the distinctions between these words and phrases. When thinking about these terms, it’s important to not get too caught up in the details to the point that you’re not actually taking action to improve in these areas.
The Terms ESG and Sustainability
Sustainability and ESG (environmental, social and governance) are very similar. However, sustainability is a broader term that refers to a company’s actions and can mean different things to different companies. In turn, ESG provides a set of concrete criteria -- namely, environment, social, and governance -- that companies can measure and report on. ESG is a term that largely comes from the investing world, where a set of criteria is especially important for a firm’s decision making.
Formalized methodologies such as Environmental, Social, and Governance (ESG) can help standardize approaches to sustainability. Asset managers, financial services providers, even robo-advisors all employ ESG criteria when making decisions. The ability to gauge ESG policies using concrete metrics has allowed investors to compare ESG attributes.
Rather than just screening organizations or industries by certain criteria, such as testing animals, using child labor, or making profits off of tobacco or gambling, ESG investing aims to identify and rank businesses exhibiting desired characteristics. ESG criteria are a subset of sustainable indicators linked to financial performance. ESG reports help investors avoid companies that could present greater financial risks because of their environmental record or other social or governmental practices.
Why Adopt These Practices?
Companies who undertake ESG reporting can adhere to internationally recognized standards and frameworks such as CDP, so communities, customers, investors, and other shareholders can compare metrics and progress accurately from one reported entity to another. Data-driven ESG reports for investors integrate the ecological impacts, social impacts (think employees, customers, and communities), and governance dimensions. Because an ESG report summarizes both qualitative and quantitative benefits from the firm's ESG activities, investors are in a position to review investments, align investments to their values, and avoid companies that are at risk for environmental harm, social lapses, or corruption.
Because ESG investing takes into account the organizations environmental, social, and governance risks and opportunities, which may materially affect its operations, the organizations environment is used to fully extend and augment conventional measures of a firm's operations to inform investors decisions.
The usage makes sense, to some extent, since the terms sustainability and ESG have the same purpose -- improving company's business practices in order to increase profits and gain favor from investors, customers, and regulators. The purpose of business ESG and sustainability is straightforward: create efficient businesses that maximize their resources, leaving the economy, environment, and social systems able to exist without end. As the corporate world becomes increasingly conscious of the need to integrate sustainability and ESG criteria into their planning, it is essential to understand sustainability goals and ESG practices.