The terms ESG and sustainability are frequently intertwined and used interchangeably. This is mainly because the E in ESG stands for environmental, and tackling environmental challenges is a big part of sustainability. While the E in ESG and sustainability both focus on similar issues, they also have some important differences which you should know about.
The term sustainability is also increasingly thrown around these days, and the definition is becoming less and less clear, which doesn’t help the situation. There is mounting pressure on the corporate sector to become more sustainable and incorporate ESG principles, so let’s talk about what makes the two different below.
ESG broken down
ESG, or as it is otherwise known, Environmental, Social, and Governance, is a corporate governance and investment framework. In other words, companies adopt these principles so they can consider, measure, and report the environmental, social, and governance aspects of their enterprise as well as its financial considerations.
Similarly, ESG investors also consider these elements when deciding whether or not to invest in a business. The environmental component relates to activities, disclosures, and attributes like greenhouse gas emissions, waste management, and carbon accounting, among others.
This category includes corporate sustainability, which is about balancing the environment, equity, and economy across packaging, products, facilities, people, waste, and energy usage in a means that will not contribute to the demise of the planet through a corporate decision-making and investment point of view.
The social category looks at social compliance attributes, disclosures and activities. For instance, labour standards, workplace health and safety, human rights, employee inclusion and diversity, as well as other community and social impacts.
The final category, governance, looks at attributes, activities, and disclosures like leadership and board diversity, corporate ownership structure, risk management, corporate policies, decision-making processes and more. It essentially focuses on aspects that balance the responsibilities, identity, and rights of the various stakeholders and shareholders within the business.
The differences between ESG and sustainability
While the terms are often used interchangeably, they do have a number of key differences. For one thing, ESG is entirely about stakeholders, decision-making and identity. In other words, the CEO, the board, shareholders, employees, and other various stakeholders. By contrast, sustainability surrounds the relationship a business has with the planet.
It is also important to note that ESG is an investment framework which enables external investors to assess company risk and performance. Sustainability, on the other hand, is a framework that enables internal capital investments. These capital investments include electrifying a transportation fleet or purchasing sustainability measurement software, for example.
ESG is also based on a number of standards set by investors, lawmakers, and ESG reporting organisations. Sustainability is also based on standards, but they are more science-based and standardised. For example, the Greenhouse Gas Protocol (GHG Protocol). There are so many different frameworks to measure ESG.
Sustainability is one of the three pillars of the ESG framework; however, ESG also incorporates social and governance issues. It is more relevant to bigger companies that require financing from institutional investors or are listed on public investment exchanges.
In saying that, ESG is also becoming more common for startups and small businesses too. The key area where ESG and sustainability differ is the materiality and risk profile. A company may have a facility that is entirely carbon-neutral, renewable-powered, and zero-waste, but the facility could be a dangerous work environment.
If that is the case, the business is not meeting all of the ESG criteria. Rather, they are simply ticking off the S. The exact opposite can be true also. A business may incorporate strong corporate governance and tackle social issues, but its model could be damaging to the planet.
Differences between ESG and sustainability reporting
Another way ESG and sustainability differ is in how you report on them. ESG reports are a requirement for investors. These reports enable them to review accurate, comparable, reliable, and timely data. The report discloses environmental, social, and governance information using specific criteria, with the goal of being transparent about any potential risks for investors.
Governance reporting is typically provided in an organisation’s yearly report. It is very standard for businesses to offer a copy of their code of ethics and governance procedures. The environmental data of ESG is a bit more challenging to report on. This is because the metrics are more complex.
However, there are new regulations constantly being developed, which is promising that the reporting standards could improve. The social issues in ESG surround labour relations, workplace health and safety, and employee wellbeing. Businesses have been rather slow to offer comparable and reliable data on these issues to date.
By contrast, a sustainability report acts as a periodic report that is published by businesses that wish to share their corporate environmental and social responsibility with stakeholders. The report publishes the information a business chooses to disclose about its actions and commitments in environmental and social areas. This spreads awareness of the organisation’s sustainable development strategy to all stakeholders, from employees to customers.
The big difference between ESG and sustainability becomes very clear in the reporting section. Many standards are utilised for ESG reporting, while sustainability reports can be much vaguer. Both also have a different target audience, with ESG reports targeting investors and sustainability reports being curated for stakeholders.
The different standards used for ESG and sustainability reporting
As mentioned, there are different standards used for both ESG and sustainability reporting. Businesses that incorporate these strategies need to understand each of the reporting standards and guidelines to be able to write their ESG and sustainability reports.
These guidelines and standards will help you offer consistent, accurate, and comparable data. In addition, improve your sustainability and ESG performance. Below we’ll dive into some of the main reporting standards used for ESG and sustainability reporting.
GRI
The Global Reporting Initiative standards help businesses comprehend their impact on the environment, economy, and society. These standards enable organisations to enhance their transparency and accountability in their contribution to sustainable development.
The standards act as a modular system consisting of three series of standards to be used in sync. These are universal standards, topic standards, and sector standards. Businesses can use these standards to curate their sustainability report or use the standards to share information for specific purposes or users like investors.
Task Force on Climate-Related Financial Disclosures (TCFD)
The Task Force on Climate-Related Financial Disclosures (TCFD) was designed to assist businesses in offering better information to support informed capital allocation. Their disclosure recommendations are structured around four thematic areas, which represent how businesses operate.
These include strategy, metrics and targets, governance, and risk management. All four recommendations are connected and supported by 11 proposed disclosures that build out the framework with details that will assist investors and others in comprehending how reporting businesses think about and assess climate-related opportunities and risks.
Sustainability Accounting Standards Board (SASB)
The Sustainability Accounting Standards Board (SASB) standards allow businesses to offer industry-based sustainability disclosures surrounding opportunities and risks that impact enterprise value. These standards determine the subset of environmental, social, and governance issues that are most relevant to financial performance and enterprise value for 77 sectors.
They were created using a transparent and rigorous standard-setting process which included broad and balanced participation from investors, subject-matter experts, and consumers. Additionally, oversight and approval from the independent SASB Standards Board and evidence-based research also helped in the development of the SASB standards. Investors across the globe recognise these standards as important requirements for businesses looking to make comparable and consistent sustainability disclosures.
International Organisation for Standardisation (ISO)
Chances are you may have heard of this one before. ISO is a non-governmental, independent, global organisation offering 164 national standard bodies. Included is the ISO 14001, which offers specific standards for an environmental management system. This ISO gives a framework that organisations can adhere to so they can enhance their environmental performance for reporting.
Climate Disclosure Standards Board (CDSB)
The Climate Disclosure Standards Board (CDSB) framework lays out an approach for reporting social and environmental information in mainstream reports. For instance, 10-K filing, integrated reports, and annual reports.
The framework is designed to assist organisations in presenting and preparing social and environmental information for the benefit of investors. It enables investors to review the relationship between particular social and environmental matters and the company’s strategy, prospects, and performance.
Green Business Bureau (GBB)
The Green Business Bureau (GBB) has the EcoPlanner and EcoAssessment, which act as sustainability guides. These guides provide sustainable practices ordered by cost and effort. Organisations can follow to support their performance from both an ESG and sustainability standpoint.
There are many more frameworks and standards out there to help businesses transition to becoming more eco-friendly. All of the above frameworks support ESG and sustainability reporting.
Summary
The terms ‘sustainability’ and ‘ESG’ are finding their way into everyday business language. It’s great to see businesses taking climate action, but it is important to understand the differences between the two terms. ESG is much broader than just the environment, and there are many ESG frameworks used for reporting. Sustainability, by contrast, hones in on the environment and the impact your business has on the planet.
