ESG and Sustainability 101: A Corporate Guide

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ESG and Sustainability

Investment firms across the globe are changing their priorities. For instance, Boston-based Trillium Asset Management is using a selection of environmental, social, and governance factors to identify companies that are in a good position for strong long-term performance. This move away from short-termism by financial institutions and capital markets has created a new buzzword in the corporate world: ESG. The terms ESG and sustainability are often used interchangeably, yet it is incorrect to do so. In this article, you’ll learn how ESG and corporate sustainability are similar, but also how they can be distinguished.

In addition, ESG and corporate sustainability have each developed their own sets of terms, for example, ESG investing, ESG policy, sustainability program, and green business. By the end of this article, you’ll be able to define ESG, corporate sustainability, and their related terms. In doing, you’ll obtain a better understanding of what true business sustainability is and how to create sustainable operations.

What’s the difference between ESG and Corporate Sustainability?

ESG (environment, social, and governance) and sustainability are two popular terms that are floated around the corporate sphere. Both have similarities that address the environmental and social aspects of a business. However, these terms are not to be used interchangeably as their specific meanings differ.

What Is Corporate Sustainability? The Dilution of the Term Sustainability

The current definition of corporate sustainability in the Oxford English Dictionary is:

“The property of being environmentally sustainable; the degree to which a process or enterprise is able to be maintained or continued while avoiding the long-term depletion of natural resources.” - Oxford, How sustainable is sustainability?

In other words, corporate sustainability creates long-term stakeholder value by implementing a sustainable business strategy. A sustainable business strategy addresses the needs of the environmental, social, and financial systems within which a business operates. The aim is to leave these systems capable of existing indefinitely.

According to a KPMG 2020 Survey of Sustainability Report, 80% of top companies now report on sustainability. In this report, the sustainability of a given company is measured under 3 key areas:

Risk of biodiversity loss
Climate change and carbon reduction reporting
Reporting on the United Nations Sustainable Development Goals

Thinking about these three focus areas, are they enough to infer whether an organization is sustainable or not?

This question highlights the problem with using the term sustainability in business. It seems the boundaries of what constitutes business sustainability are fuzzy, making it difficult to ascertain whether an organization's work should be promoted as sustainable or downgraded to merely greenwash. That is, the company uses exaggerated claims to position itself as sustainable.

According to another survey by Advanced 2021/22 Trends Report, questioning 1,078 employees, 43% thought their company was guilty of greenwash.

The absence of clear-set criteria has meant sustainability, as a term, has been hijacked, diluted, and misunderstood. The continual re-definition of sustainability has created an environment where people are unsure about its meaning and what aspects to focus on.

For instance, suddenly sustainability is about climate change, ending poverty, and achieving gender equality.

This definitional dilution has meant organizations issue sustainability strategies, incentives, and policies that may not be focused on the original object of sustainability. And the rules are simple: Sustainability means taking only what you need and leaving systems capable of continued existence.

What Is ESG Sustainability? The Evolution of ESG

Earlier this year, a CNBC story announced that…

“There’s no hotter area on Wall Street than ESG with sustainability-focused funds nearing $2 trillion.” - Pippa Stevens, CNBC market

In 2004, Kofi Annan, then the UN Secretary, asked major financial institutions to partner with the UN and the International Finance Corporate. The aim was to identify ways that will integrate environmental, social, and governance concerns into capital markets. The resulting 2005 study, titled Who Cares Wins, marked the first use of the term ESG.

ESG evolved from business sustainability. Financial institutions recognized the need to safeguard our environment and hold high social morals for sustained financial success.

The main difference between ESG and sustainability is that ESG sets specific criteria to define environmental, social, and governance systems as sustainable.

As we know, in a business context, sustainability may mean different things to different entities and is applied as an umbrella term of doing good. This translates into ethical and responsible business practices. Embedded into this term are concerns for social equity and economic development.

ESG points to a specific set of criteria that remove the ambiguity surrounding the term sustainability. As such, ESG is a preferred term for investors.

Larger discussions in business began with sustainability, but have since evolved to include ESG performance and accountability. ESG data helps identify risk-adjusted returns and highlights relevance to capital opportunities. ESG topics are interlinked and draw attention to the multifaceted risks of social, technological, political, environmental, and economic business aspects.

Companies are using the ESG criteria to mitigate business risk and prepare for the future.

Understanding Corporate Sustainability and Its Related Terms

Sustainability has become a buzzword for climate change mitigation, social responsibility, and using less plastic.

For a better understanding of the word, and what it means to be sustainable, let’s consider some related terms embedded into the sustainability context. These are terms often and incorrectly used interchangeably.

Corporate Social Responsibility

Corporate social responsibility (CSR) is a form of business regulation that guides companies to operate in a socially responsible way. Core subjects listed in CSR include:

Human rights: To support and protect human rights, ensuring they are not complicit with abuses in their operations and seek to eliminate forms of forced labor.
Fair labor practices: Promote equality and eliminate discrimination regarding employment.
The environment: Take responsibility for the environmental impacts of business.
Fair operating practices: Adhere to ethical business practices, including anti-corruption measures, whistle-blower mechanisms, and responsible marketing.
Consumer issues: Extend responsibility to their supply chain, and ensure these principles are upheld by their suppliers, partners, distributors, and other third parties.
Community involvement and development: Embrace transparency and report on the company’s progress across corporate social responsibility topics.

Green Business

The term green is widely used when thinking about business sustainability. Green is implemented as a prefix for projects, actions, programs, or products that consider environmental protection. However, the term’s overuse has diluted its meaning, to a point that it’s become almost meaningless.

As a color of vegetation, green is often used for branding purposes to project an Earth-tone that gives a product or service a sustainability-related appeal. Yet, this is a branding tactic that’s sometimes implicated as greenwash.

Sustainability Strategy

A sustainability strategy is a prioritized set of actions that focus investment and drive performance, creating environmental, social, and economic systems that can be sustained long-term. Sustainable development is incorporated into the short, medium, and long-term strategic plans of a business.

This involves detailing a clear set of sustainability statements, programs, plans, actions, and goals that outline how a business will compete in a particular market, or markets, sustainably.

Sustainability Program

A sustainability program is part of your sustainability strategy. This is an actionable roadmap reporting the related measures and activities that drive results and tell your sustainability story. This incorporates the organizational structure, well-defined initiatives, and specific implementation plans.

To be effective, sustainability programs must address your sustainable strategy as a continuum. Both your strategy and your program need room to grow organically, adjust and evolve. After all, the economic, environmental, and social needs of a business will continually change.

A sustainability program relies on broad sustainability objectives and goals to coordinate multiple projects and plans.

Sustainability Plan

A sustainability plan is a course of action, created in advance and designed to complete a given goal from a sustainability program.

A broad set of goals and actions are set by a sustainability strategy. These are then organized into a sustainability program and organized further into actionable sustainability plans.

It’s important to understand that a sustainability program will contain more than one sustainable plan to achieve the overarching sustainability strategy.

Sustainability Framework

A sustainability framework is the essential supporting structure for sustainability. A framework for business sustainability was first described in the early 70s in the publication The Limits To Growth.

This publication defined three pillars of corporate sustainability: The economic, environmental, and social pillars.

Pillar 1, the environment: Businesses must support, protect and not damage the environment.
Pillar 2, the society: Businesses must manage relationships between stakeholders and support communities.
Pillar 3, the economy: Businesses must meet their financial obligations to shareholders, and be economically viable.

By meeting the needs of each, the sustainability framework is supported, and a business achieves long-term corporate success.

Economic Sustainability

Economic sustainability refers to indefinite economic production to support long-term business prosperity, without negatively impacting the social and environmental aspects of a business.

It’s counterproductive for businesses to strive for economic sustainability and yet push for continued GDP growth. GDP growth cannot happen indefinitely as it’s bounded by the limits of our planet and society. Rather, organizations must be economically viable, but not strive for indefinite growth as the latter is not sustainable.

Understanding ESG and Its Related Terms

ESG differs from sustainability as ESG sets more specific criteria regarding scope, benchmarking, and the disclosure of data. For a better understanding of ESG let’s consider the other terms embedded into the ESG context.

ESG Investing

As previously mentioned, ESG was developed by financial institutions with investment in mind. ESG investing is also known as impact investing. ESG investing is born from the growing assumption that the financial performance of businesses is increasingly affected by environmental and social factors.

ESG is the preferred term for capital markets to make responsible investments. A 2020 Trends Report by the United States Forum for Sustainable and Responsible Investment noted total ESG investment assets under management reached $1.71 trillion - a 42% increase since 2018. In 2021, it’s estimated that 33% of all U.S. assets under professional management are tied to ESG related investment.

The main catalyst for this rise in ESG investment is companies scoring highly against ESG criteria and outperforming their counterparts. For instance, the stock performance of ESG companies has lower volatility (28.67% lower) and a positive effect on equity with a return of 6.12%.

ESG Metrics

ESG metrics are used to assess a company’s exposure to a range of environmental, social, and governance risks. These are metrics to be used for a range of ESG integration approaches, such as benchmarking and scenario analysis.

They are similar to metrics used in traditional financial analysis, however, ESG metrics incorporate non-financial data, such as the level of greenhouse gas emissions and the number of health and safety incidents per year.

For instance, take the biopharmaceutical company AstraZeneca as an example. If we look at AstraZeneca’s 2020 sustainability report, they’ve reported on the following ESG metrics:

Greenhouse gas emission metrics: With a 60% reduction in scope 1 and scope 3 GHG since 2015.
Waste: With a 2% reduction in waste since 2015.
Employee health and safety: With 89% of employees feeling that AstraZeneca is a great place to work.
Compliance governance: 49.1 instances of non-compliance with the Code of Ethics per thousand employees in commercial business units.

This example gives you a snapshot of what ESG metric reporting looks like. This information is taken into account by investors to decipher where a company lies regarding its ESG performance.

ESG Policy

A policy is a course or principles of action adopted or proposed by a business. An ESG policy accounts for ESG-specific legislation and guidance. To write an ESG policy organizations must:

Review core business principles and values.
Be familiar with industry-relevant and ESG-specific legislation and guidance.
Understand the language and terminology used for responsible investment and stewardship.
Understand regional and international ESG-related standards

ESG Framework

ESG frameworks are systems that standardize the reporting and disclosure of ESG metrics. These frameworks are put together by NGOs, business groups, and others meaning they vary widely regarding the areas of focus and the metrics recommended.

For instance, one commonly used ESG framework is the Global Reporting Initiative (GRI). GRI provides a set of standards for responsible environmental, social, economic, and governance conduct over a wide range of topics.

Following an ESG framework like GRI standardizes reporting for ESG assessments.

ESG Reporting

ESG reporting refers to the disclosure of data - using ESG metrics - that cover a company’s operations across the three areas: environment, social and corporate governance. An ESG report gives a snapshot of a business’s impact across these three areas for investors.

Standardized reporting methods, such as GRI, are designed to summarize quantitative and qualitative information, for easy disclosure and improved transparency to screen investments. ESG reporting helps investors avoid companies that may pose a greater financial risk due to their environmental performance or other social or government practices.

ESG Certification

ESG certification involves an audit to assess ESG risks. These audits use selected environmental, social, and governance certification standards and ESG frameworks.

ESG metrics are compared to benchmarks set by the assessor. The aim is to determine where a business lies regarding its ESG performance, plus to identify related risks. Certification validates a business's efforts to improve ESG performance.

Organizations will seek out third-party sustainability assessments to improve their ESG performance. For instance, partnering with the Green Business Bureau to use GBB’s sustainability assessment is reported to boost a business’s ESG performance. GBB allows organizations to assess their current performance against set criteria for sustainability, meaning organizations can identify opportunities and strategize to improve ESG performance.

ESG and Sustainability: Two different terms but with the same goal

The goal of corporate ESG and sustainability is simple, to create businesses that take only what they need, while leaving economic, environmental, and societal systems capable of indefinite existence.

To meet this aim, it’s vital a thorough understanding of ESG and sustainability (plus their related terms) is achieved. Without this understanding, businesses are running blind.

To read more about the terms "ESG" and "Sustainability" and how they are related, but slightly different, check out this article that compares the terms in more detail: ESG vs Sustainability: What’s the Difference?

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