Intro to ESG, Part 3 – What is sustainability? And where does ESG fit?

Do you ever wonder “What’s the difference between ‘sustainability’ and ‘ESG’”? And what about corporate social responsibility, where does that fit? I admit it seems most days as if there isn’t a difference between all of these terms. For those of you who are new to this space, I’m going to describe the high-level differences between the terms and how we think of sustainability at Responsibility Matters. (Because what is the point of having a blog if you can’t have a “soap box” moment?)  

A caveat: My goal today is to highlight how the terms tend to be used, and how we use them, but, in practice, these terms are often conflated. And while I’m sure the dictionary police won’t come get you if you use them interchangeably, I think it is important to know where some key differences lie.

Being a good corporate citizen

Over the years, different approaches to corporate responsibility have emphasized different factors but virtually all approaches have included the management of a company’s social and environmental impacts, and the creation of value for all stakeholders (not just shareholders). Earlier forms of the good corporate citizen movement were primarily focused on social aspects of citizenship such as the building of schools or hospitals (for example, during the industrial revolution), with the environmental imperative being a more recent addition. Popular recent terms that describe this approach include “triple bottom line”, “corporate social responsibility”, and “corporate citizenship”.

The motivation behind being a responsible company or a good corporate citizen is often an ethical one, a desire to “do the right thing”. Although the concept is not new, a recent example of the renewed attention this concept is getting is the Business Roundtable, with 180 CEOs working to redefine the purpose of a corporation, moving away from creating value for just shareholders to ensuring the creation of value for all stakeholders.

Preserving company value

ESG (environment, social, governance) is a relative newcomer as far as corporate sustainability jargon goes and it refers to three key non-financial categories in evaluating a company’s risk profile and performance – environment, social, and governance. The concept was first coined in 2005 in a study titled “Who Cares Wins”, but wasn’t widely used until late 2016. ESG is the most commonly used term in capital markets today.

As opposed to some of the other terms, ESG is primarily driven by the desire to preserve or create financial value. The logic is that companies will either avoid costs by reducing their environmental, social, and governance risks, or they will be able to anticipate environmental and social opportunities and create financial value. In either situation, the case for ESG is first-and-foremost a financial one with ethical considerations being a secondary motivation (For today I will remain focused on the perspective of the corporation and not on the perspective of investors. I’ll save that for another post).

How we think of sustainability

We see corporate sustainability quite simply as a company’s ability to stay in business over time. That means that any company that wants to be around 30, 50, 100 years from now needs to manage its risks (including social, environmental, and governance matters), create value for all stakeholders, and seek out new opportunities for innovation and differentiation.

It is also our position that the terminology a company chooses is less important than a clear grasp on what it important to them and a solid execution of their strategy. The end result of either approach tends to be similar. For instance, company activities that will reduce ESG risks often lead to outcomes that are good for the environment, for society, and for the company. And “doing what’s right” for the environment and society is certainly a major factor in ensuring social license and maintaining natural and social capital, which are essential to stay in business long term.

Why is it so confusing?

The challenge is that activities undertaken in the name of ESG tend to be the same at those undertaken in the name of responsibility and sustainability. In practice, activities include ensuring positive relationships with communities, maintaining a diverse and inclusive workforce, supporting human rights throughout the supply chain, reducing energy, emissions and water use, and creating products that improve the lives of customers. But even though corporate activities are often the same, the motivation can be different.

Does the distinction even matter?

Most of the time, not really. It does matter, however, if you are trying to grab the attention of a specific audience. For example, sustainability or corporate responsibility reports are meant for a broad set of stakeholders, while ESG reports are directed towards investors and other financial market stakeholders. In each of these types of reports, the same activity is described differently for different audiences. Take the example of changing from incandescent to LED lighting: It reduces costs (better argument for investors) and reduces the impact on the environment (better argument for all stakeholders).

Key takeaway

In short, despite being used interchangeably, these terms do have some differences in terms of motivation and how these activities are reported on.

What term are you hearing the most right now?