ESG and Sustainability– what’s the difference?
The cooperate sphere is getting sensitised on the need to incorporate environment, social, and governance (ESG) criteria in decision making, therefore it is important to differentiate between the ESG practices and sustainability goals.
This article attempts to differentiate between ESG and Sustainability.
The term “green” is widely used as a prefix denoting projects, actions, programmes, or products that take into consideration environmental protection, but it has been either overused or misused to a point of becoming almost meaningless. Sustainability, too, is becoming over-generalised to an extent that it may follow a similar course. Borrowing from the Oxford English dictionary and putting it in an environmental context, sustainability denotes using resources in a manner that ensures an ecological balance. It encompasses any business practice that lives by the principle “do well by doing good.”
To some, sustainability has come to replace several other well-meaning terms to an extent where it has overshadowed corporate responsibility among other related phrases. Perhaps coming to save the situation, a popular substitute has emerged – the environmental, social, and governance (ESG) performance. However, the two differ in many aspects including scope, benchmarking aspects, and disclosure of data.
What is ESG and how is it similar to sustainability?
ESG and Sustainability have some similarities in that they address the environmental and social aspects. However, there are some differences; while sustainability may mean different things to different entities, ESG is about the specific set of criteria denoting environmental, social, and governance.
ESG is an acronym standing for the environment, social, and governance, where environment denotes the reduction of carbon and other greenhouse emission or generally protecting the environment. Social criteria look into how entities manage the relationship between and among stakeholders, while governance denotes practising fairness and transparency in the management as well as actively disclosing information to the relevant stakeholders.
Differences
Comparing the scope of each, it is evident that there is a difference. The distinction between the two is well marked and arguably relevant in the sphere of investment.
Sustainable investment is based on the selection of projects or programs that have a positive impact on social and environmental aspects where an entity is ready to sacrifice profits for a clean environment.
On the other hand, ESG bases investment decisions on a broader level where in addition to the promotion of socially and environmentally conscious practices it screens out investments based on given criteria such as treatment of workers, animal testing, child labour among others. In general terms, ESG seeks the identification and ranking of undertakings that show desirable characteristics. These characteristics are broader than what is considered in sustainability, they extend to directors’ pay, diversity of stakeholders, treatment of the workers, community engagement, and health and safety issues among others.
Transition to ESG
Some say change is as good as rest, transiting from sustainability to ESG metrics shows the evolution of business practices to more accurate performance measurements. With the business sphere becoming more sophisticated, there is a need to improve on the collection and tracking metrics with an aim of building ESG management. To make the organization more sustainable there is an expansion of scope where initiatives are better captured through examining them using the ESG lens rather than the broad cover of sustainability.
ESG is becoming an important metric where businesses or projects that have lower risk portfolios, higher gains, and are more resilient to shocks show a high ESG performance. Going forward businesses will be expected to have high-quality and accurate ESG data when making an investment decision. This means they have to collect timely, complete, accurate, and auditable data.
A comparison of ESG and sustainability may appear like a matter of semantics, but in an ever-evolving world, it is crucial to understand the two terms and concentrate on what matters. Sustainability is a general term for a business that aims at doing better while ESG highlights the pillars that are important to business today.
