Understanding the Difference: ESG vs. Sustainability
Sustainability & ESG, Guides / January 30, 2023
By Paul Gassett
The concepts of ESG (environmental, social, and governance) and sustainability play pivotal roles in driving positive impact and long-term success.
While the terms “sustainability” and “ESG” are often times used somewhat interchangeably, there are some distinct differences according to the Corporate Finance Institute.
But what precisely does ESG mean, and how does it differ from sustainability? In this piece, we’ll delve into the distinction between ESG and sustainability and the reasons why it’s crucial for businesses to be familiar with both concepts.
Sustainability vs. ESG: A Brief History of Terminology
Before we dive in, it is helpful to look at the history of the two concepts to gain the proper perspective.
The 1980s
A common term, EHS, which stood for Environment, Health, and Safety, was prevalent. EHS was based on the development of environmental and employee regulations.
The 1990s
The term “Sustainability” was used to describe an organization’s focus on reducing environmental impacts beyond legal requirements.
2000 – 2010
CSR, or Corporate Social Responsibility took hold, describing a corporation’s philanthropy and employee volunteer efforts to align to social issues.
2020 and beyond
The term ESG is emerging as a holistic concept. It is related to achieving a competitive advantage and improving a company’s risk and reward management efforts.
Yet many organizations still utilize “Sustainability” in the modern era.
What is ESG?
ESG stands for environmental, social, and governance. These are the three key factors used to evaluate the sustainability and ethical impact of a company’s operations.
Environmental Factors
Environmental factors refer to a company’s impact on the natural world. This includes things like carbon emissions, waste management, and resource usage. Companies with strong environmental practices prioritize sustainability and work to minimize their negative impact on the planet.
Social Factors
Social factors refer to a company’s impact on society. This includes things like labor practices, human rights, and community engagement. Companies with strong social practices prioritize the well-being of their employees, customers, and the communities in which they operate.
Governance Factors
Governance factors refer to a company’s internal policies and procedures. This includes things like board diversity, executive compensation, and transparency. Companies with strong governance practices prioritize ethical and responsible decision-making and are accountable to their stakeholders.
What is Sustainability?
Sustainability is a broader concept that encompasses ESG factors. It refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainability is often broken down into three pillars: environmental, social, and economic. These pillars are interconnected and must be balanced for true sustainability to be achieved.
Environmental Sustainability
Environmental sustainability refers to the responsible use of natural resources and the protection of the environment. This includes things like reducing carbon emissions, conserving water, and protecting biodiversity.
Social Sustainability
Social sustainability refers to the well-being of people and communities. This includes things like promoting social justice, ensuring access to education and healthcare, and creating safe and inclusive work environments.
Economic Sustainability
Economic sustainability refers to the ability to maintain economic growth and development without depleting resources or causing harm to the environment or society. This includes things like responsible resource management, fair labor practices, and ethical business practices.
The Difference Between ESG and Sustainability
While ESG and sustainability are closely related, there are some key differences between the two concepts.
Scope
ESG is a more narrow concept, focusing specifically on the environmental, social, and governance factors of a company. Sustainability, on the other hand, is a broader concept that encompasses ESG factors but also includes economic sustainability.
Timeframe
ESG factors are typically evaluated in the present, looking at a company’s current practices and impact. Sustainability, on the other hand, takes a longer-term view, considering the impact of a company’s actions on future generations.
Focus
ESG is primarily focused on evaluating a company’s practices and impact, while sustainability is focused on achieving a balance between environmental, social, and economic factors.
Snapshot View of the Differences
ESG looks at how the world impacts a company or investment.
Sustainability focuses on how a company (or investment) impacts the world.
What are the similarities between sustainability and ESG reporting?
Yet, while we are discussing the differences, it is also important to understand the similarities between ESG and sustainability. Both are strategic frameworks used to boost business resilience and help improve overall company performance.
Why Businesses Need to Understand Both ESG and Sustainability
Both ESG and sustainability are important concepts for businesses to understand and prioritize. Here’s why.
Meeting Stakeholder Expectations
In today’s world, stakeholders – including customers, employees, investors, and regulators – are increasingly expecting companies to prioritize ESG and sustainability. Companies that fail to do so risk losing the trust and support of their stakeholders.
Mitigating Risk
By understanding and addressing ESG factors, companies can mitigate potential risks and avoid negative impacts on their reputation and bottom line. For example, a company with poor environmental practices may face fines and penalties, while a company with poor social practices may face boycotts and protests.
Attracting Investment
Investors are increasingly looking at ESG factors when making investment decisions. Companies that prioritize ESG and sustainability are more likely to attract investment and achieve long-term success.
Driving Innovation
Prioritizing ESG and sustainability can also drive innovation and help companies stay ahead of the curve. By finding sustainable solutions and implementing responsible practices, companies can differentiate themselves from their competitors and create new opportunities for growth.
How to Integrate ESG and Sustainability into Business Practices
Integrating ESG and sustainability into business practices requires a holistic approach and a commitment from all levels of the organization. Here are some key steps businesses can take to integrate ESG and sustainability into their operations.
Conduct a Materiality Assessment
A materiality assessment is a process of identifying and prioritizing the most important ESG issues for a company. This can help businesses understand where they have the most significant impact and where they need to focus their efforts.
Set Goals and Targets
Once the most important ESG issues have been identified, businesses can set goals and targets to address them. These goals should be specific, measurable, and time-bound, and should align with the company’s overall mission and values.
Implement Sustainable Solutions
Implementing sustainable solutions is a key part of integrating ESG and sustainability into business practices. This can include things like reducing carbon emissions, implementing sustainable supply chain practices, and promoting diversity and inclusion within the company.
Communicate and Report on Progress
Transparency and communication are essential when it comes to ESG and sustainability. Companies should regularly communicate with stakeholders about their progress and challenges, and report on their ESG and sustainability efforts.
Conclusion
ESG and sustainability are two important concepts that businesses need to understand and prioritize in order to succeed in today’s world. By understanding the difference between the two and integrating them into business practices, companies can meet stakeholder expectations, mitigate risk, attract investment, and drive innovation.
How OBATA Can Help
OBATA provides comprehensive support to companies wanting to create an ESG or Sustainability Report. We can guide companies through the entire process helping them enhance their reporting practices and meet stakeholder expectations.
Our firm offers a wide range of services including ESG strategy development, materiality assessment, stakeholder engagement, reporting framework, data collection and analysis, content and creative development, publication, and promotion.
