July 19, 2022
Climate change is driving corporations, organizations, and governments to look for tools that assist them in measuring their sustainability performance. Standardized benchmarking processes are growing in popularity and Environmental, Social, Governance (ESG) is now a major talking point – as is environmental sustainability.
However, while ESG and sustainability are often confused or used interchangeably, they are not the same. Understanding their differences is the key to reaching your organization’s net zero goals effectively. In this article, we break down the key differences between these two important terms and how each is measured, as they pertain to corporate strategy.
In essence, ESG is an investment and corporate governance framework. When put into the context of corporate strategy, businesses that adopt the principles of ESG, assess, measure, report, and work towards reducing their impacts on environmental, social and governance levels of their operations.
ESG also has implications for a business’ financial operations, including expenses, profit, accounting and growth. ESG investors take a company’s social, environmental and governance characteristics into account alongside its financial attributes when making decisions to invest in them, and to what extent.
ESG pertains to operations, risk, capital, reputation and reporting – sometimes referred to by the acronym CORRR. This includes many attributes that reach beyond environmental sustainability. ESG in itself is an acronym as well, which stands for:
This aspect of the ESG framework pertains to environmental attributes, activities and disclosures. It includes carbon accounting, waste management, CO2 emissions, and other essential considerations. The category focuses deeply on corporate sustainability metrics and actions. It’s inclusive of mitigating impacts on the environment, equity and economy throughout product lines, energy usage, facilities, packaging, human capital, and waste in a way that does not exacerbate the effects of climate change and loss of biodiversity. All of these considerations are viewed from a corporate decision-making and investment standpoint.
The Social category of ESG pertains to social compliance protocols, disclosures and attributes. It includes labor standards, human rights, health and safety in the workplace, employee inclusion and diversity, and a wide range of additional community and social impacts.
This category focuses on governance attributes, disclosures and activities. For example, leadership diversity, decision-making protocols, ownership structures, corporate policies, risk management, and many other facets of a business that focus on the rights, responsibilities and roles of stakeholders and shareholders.
Some experts view corporate ESG as the external or social component of financial accounting. As financial accounting does not fully account for the risks and consequences of corporate operations in the long term, ESG can be used to create a more holistic view of a firm’s operations to guide informed investment and decision-making processes.
Over the past decade, sustainability has become synonymous with terms like “CO2 reduction” and ‘“going green”. When many people think about corporate sustainability, they picture energy consumption reduction efforts, water preservation, and other environmentally focused efforts to reduce a business’ impacts on the local environment.
These are all valid and essential goals for any business that wishes to enhance its efficiency, reduce expenses, and mitigate its impacts on the environment. But this definition of sustainability is not complete. Sustainability is an umbrella term that can encapsulate an organization’s full spectrum of efforts to reduce and minimize its negative impacts on the world. For instance, sustainability can cover the creation of more equitable jobs or the promotion of workplace diversity alongside environmental preservation.
This incomplete and narrow definition of sustainability has prevented many organizations from truly integrating sustainability into their operations. It also limits them in effectively measuring and reporting on their efforts. ESG is a more specific and data-driven framework. It focuses on three clear dimensions rather than vague or ambiguous terms like “going green” or “environmental responsibility”. This makes it generally more effective for businesses that truly aim to create more sustainable operational strategies.
Before we delve into the differences between ESG and sustainability, it’s important to understand how ESG scoring works and how sustainability is measured.
ESG encompasses a wide range of criteria, including Environmental criteria like energy usage, greenhouse gas emissions and waste generation. Social criteria like human rights, diversity, and fair labor practices, and Governance criteria like anti-corruption and bribery efforts and board diversity.
Organizations have been working towards better ESG standards in recent years. However, there is still much that’s open to interpretation. Stricter ESG investors may only consider financing the most environmentally responsible organizations. Others may only avoid those involved in industries like fossil fuels. ESG requirements do vary. While these scores are relevant for public entities, privately held and smaller companies do not face the same pressure to produce a high ESG rating.
Sustainability benchmarks can vary widely, depending on the business and its industry. There are numerous factors involved in measuring sustainability that would differ between, say, a fruit producer in California that ships produce to Argentina for packaging and then ships packaged goods back to the US for distribution, and a logistics company with a global customer base and routes spanning several continents. The first company may be able to investigate local packaging opportunities to increase their sustainability. The second may need to investigate creating more fuel-efficient routes and methods of transportation to increase theirs.
Sustainability is increasingly being linked with social issues, including issues like income inequality and racial justice. This makes it intersectional, complex and extremely broad. ESG ratings are narrow and far more quantifiable, making them more appropriate for many businesses that wish to estimate their future profitability and growth.
Ultimately, ESG and sustainability are both important strategic considerations for investors, executive bodies, and modern organizations. ESG focuses on how the world may impact an investment or company. Sustainability pertains to how a company or asset impacts the world around it.
These two concepts do overlap to a certain degree. But there are a few fundamental distinctions between them, and between how a company should implement, prioritize and measure ESG performance alongside their sustainability goals and initiatives.
SINAI enables organizations to efficiently determine and implement both ESG frameworks and sustainability targets using technology built on the Science Based Targets initiative’s guidelines and principles. Our decarbonization platform enables you to quantify and report on emissions targets and dynamic carbon budgets. To build and evaluate mitigation options and transition risk strategies, automate GHG inventories, and predict pathways to align with ESG metrics and sustainability guidelines alike. This is achieved through a range of collaborative, industry-specific platforms that allow you to consolidate environmental and financial data across your organization.
Get in touch with our team to learn more about how we can help you meet your ESG and sustainability goals.