Climate change vulnerability, environmental destruction and eco-responsibility are just some of the concepts and terms you hear being discussed by media and government entities nowadays. Rightfully so, since environmental stewardship has become one of the most important topics of conversation this year.
Various entities have been championing sustainability to be included in policies, regulations and their own internal framework. This lobbying for sustainability aims to help build communities, protect its stakeholders and cause less environmental harm.
The corporate world has started to follow suit. It has included the environment, social and governance aspects of their business to work in tandem with its financial considerations. This is in the hope that they can holistically measure and improve all these factors. Hence, the coining of the corporate buzzword: ESG.
Sustainability has evolved over recent years and multiple industries use the term synonymously with ESG. However, this interchangeability causes much confusion, even within the corporate world.
How can we know which is which? Let’s dig further into the difference between ESG and sustainability.
What Is ESG and Its Three Pillars?
The term ESG was first coined in the investment community and stood for environmental, social and governance. This pertains to the three aspects a business would focus, measure and report on.
At its core, ESG is a corporate governance and investment framework. This entails forming a company’s mission, vision, strategy and values intertwined with ESG principles that go beyond environmental sustainability.
Environment
In the environmental aspect, companies look at the environmental activities, attributes and disclosures, such as waste management, carbon accounting and greenhouse emissions. This aspect clearly defines the ESG and sustainability relationship and why many people think they’re the same.
In ESG, companies consider balancing the environment, economy and equity across their products, facilities, people, waste and energy usage to operate in ways that won’t contribute to climate change, global warming and biodiversity loss. All of these are then viewed under a corporate decision-making and investment lens.
Social
Under the social aspect, ESG looks at important social activities that champion human rights in all aspects, suitable workplace conditions and standards, proper labour standards and treatment and inclusion for all.
ESG maps these social considerations, including their risks and benefits and measures their social and community impacts. This performance rating informs whether a company is worth investing in.
Governance
Governance attributes, such as corporate owner structure, leadership and board diversity, corporate decisions, policies and risk management, are viewed under an investment lens. This assessment ensures that the rights, responsibilities and identities of various shareholders and stakeholders are transparent, balanced and well-defined.
In the context of financial accounting, it’s clear that reporting on finances alone doesn’t provide investors with a holistic view of a company’s operating risks and consequences for the long term. This is why many investors have adopted the ESG framework and principles and use these metrics to assess if a company is worth investing in.
An example of ESG considerations impacting a business decision, would be a company that produces cleaning products that gain profit for a year. However, one of its practices is to dump any excess products in a nearby landfill and tap into a water source that provides for a nearby community. Whilst it may have an outstanding financial performance on paper, an ESG investor would immediately recognise that the company doesn’t align with the sustainability principles. Its practices may harm its viability, and the government can opt for its closure. This is a considerable risk since no ESG-conscious investor would place money in this company.
ESG and Its Related Terms
Another way to better understand ESG is by recognising the terms used under the umbrella of ESG. Here are a few relevant ones:
ESG Investing
ESG investing is also known as impact investing. It assumes that focusing solely on financial performance is not a full measure and should include social and environmental factors. It postulates that these social and environmental factors also affect economic performance; thus, companies with higher ESG scores perform better.
ESG Metrics
ESG investment frameworks use these metrics to assess a company’s exposure to social, environmental and governance risks using various analytics, such as benchmarking and scenario analysis. Non-financial data, including carbon emissions, waste reduction, energy reduction and other metrics, are coupled with financial data.
ESG Reporting
ESG reporting is the entire disclosure gathered using ESG metrics to reflect a company’s operations and provides a summary of quantitative and qualitative data showing the impact across environmental, social and governance areas. This report helps investors avoid companies that pose a high financial risk due to their environmental, governance and social practices.
What’s the Difference Between ESG and Sustainability?
Whilst we’ve touched on the definition of ESG, there is still the issue of ESG and sustainability differences. Here is a list of the critical differences between ESG and sustainability:
- ESG focuses on the components that make up the company, such as its stakeholders, regulations that govern it, guiding principles and practices. On the other hand, sustainability focuses on the relationship between the company and the environment and how they impact each other.
- ESG is a corporate governance and investment framework used to measure a company’s performance, risks and operational capabilities to help investors assess whether a company is worth investing in. Sustainability is also a framework; however, the difference lies in internal capital investments to improve and drive performance.
- Lawmakers, investors and non-governmental organisations set the standards of ESG by organisations, such as S&P Global, MSCI, Bloomberg and FTSE Russell, to name a few. On the other hand, sustainability follows a more scientific approach and is where they base their standards.
- ESG incorporates sustainability as one of its main three aspects but includes social and governance considerations under its umbrella. This makes ESG more encompassing but focuses more on the investment portion rather than an internal focus on the company’s growth and performance.
- ESG applies to public corporations and larger companies listed on a stock exchange or companies that need financing from institutional investors. Private companies, however, are adapting to the times and see the need to include ESG in their guidelines and operations, as banks and financial lending firms have already adopted an ESG stance.
How Madison Marcus Can Help You
In summary, ESG and sustainability may overlap in a particular aspect, but they’re different in how they measure data and provide guidelines to improve certain aspects of a company. In other terms, ESG looks at how the environment influences companies, whilst sustainability looks at how the companies affect the environment.
Do you have any enquiries on ESG and sustainability? At Madison Marcus, we have experts who can help with your legal needs and questions. For all enquiries or initial consultation, contact us here.
