ESG & Sustainability: Are They Similar Or Different?

by | Nov 29, 2023 | ESG, Sustainability

Home » Sustainability » ESG & Sustainability: Are They Similar Or Different?

Sustainability and ESG address environmental and social concerns. However, there are differences in measuring data and disclosures. As a result, it’s critical to understand the distinctions between ESG sustainability initiatives, especially if you’re in charge of adopting them in your organization.

What is Sustainability?

Sustainability has been synonymous with “reducing your carbon footprint” or “going green” over the previous decade. As a result, when people think about sustainability, they think of limiting their consumption of fossil fuels and energy, as well as carbon and other greenhouse gas emissions. However, that is a somewhat limited concept of sustainability. Sustainability is a collective word for “doing good,” which incorporates all of a company’s moral and ethical business practices to lessen its global effect. Its ‘Green’ activity, corporate social responsibility (CSR), net zero, and low carbon are all used words. Footprint, energy, water, resource conservation, circularity inclusion and diversity, human rights, green supply chain management, safety and health, product stewardship, etc.

The three Ps of sustainability are a well-known business idea commonly known as the triple bottom line—the three Ps stand for People, Planet, and Profit. A company’s balance sheet must incorporate people, the environment, and the profit line. Sustainability is critical to safeguarding and maximizing the benefits of the three Ps. People are taken care of by green initiatives. They accommodate the planet’s needs by protecting its valuable resources, and they strive for profit without waste.

Furthermore, various organizations may define sustainability differently. Activity under the sustainability umbrella varies depending on the company and its movement. However, they may include:

  • Getting rid of paper
  • Accounting for GHGs
  • Acquisition of energy-efficient office equipment
  • Waste inspection
  • Providing compensated volunteer days
  • Keeping DEI (diversity, equality, and inclusion) in place, a consultant to evaluate firm practices
  • Organizing a stream or roadway clean-up

Sustainability programs enable organizations to be innovative in identifying appropriate possibilities and actions for them and their workforce. Some organizations may use the chance to assess goals and progress, while others will launch new projects each year.

What is ESG?

ESG is far more specific and data-driven than simply “going green” or being a good steward. ESG stands for Environmental, Social, and Governance. ESG is primarily a framework for corporate governance and investment. Organizations that follow ESG principles consider, quantify, report, and try to improve their business’s environmental, social, and governance components in addition to its financial considerations (profit, growth, expenses, and accounting).

ESG’s Three Pillars

ESG Sustainability: Are They Similar Or Different?

  • E – Environment: Describes how a company decreases its environmental effect, which has far-reaching implications for the society in which it works and for the planet. Through corporate decision-making and investments, this ESG category essentially incorporates the description of corporate sustainability — managing the economy, the environment, and other factors across products, energy usage, packaging, facilities, people, and waste in a way that does not cause the effects of global warming, climate change, and biodiversity loss.
  • S – Social: Describes how a corporation looks after its employees and assists in their overall success. Their inclusivity and diversity will pave the path for a more sustainable future.
  • G – Governance: This term refers to how a company guarantees compliance, transparency, best industry practices, and cooperation with regulators. It also controls the internal method, procedure, and control system.

Differences between ESG and Sustainability

1. ESG concerns company identity, decision-making, and stakeholders – the CEO, board, shareholders, employees, and other stakeholders — whereas sustainability affects a firm’s relationship with the environment.

2. ESG includes sustainability as one of its three components but also considers the big picture and social and corporate governance issues.

3. ESG is more practical for large organizations that are publicly traded or require investment from institutional investors. However, many banks and financial corporations are already adopting ESG concepts, and as a result, ESG is becoming increasingly important to start-ups and smaller businesses compared to sustainability.

4. ESG is an investment framework that helps external investors evaluate a company’s performance and risk. In contrast, sustainability is a framework for making internal capital investments (for example, installing LED light bulbs or purchasing sustainability measurement software).

5. ESG is based on benchmarks established by policymakers, investors, and ESG reporting organizations (e.g., GRI, MSCI, TCFD). In contrast, sustainability criteria set by standards bodies, such as the GHG Protocol, are more standardized and scientifically grounded. There are numerous frameworks for assessing ESG, although carbon (CO2) is carbon, and sustainability criteria could be more creative.

The Key Difference Between ESG and Sustainability

Finally, the impact lens is the most straightforward approach to distinguish between ESG and Sustainability:

ESG considers how the outside world influences an investment or a firm, whereas sustainability considers how a company (or buy) affects the outside world. The distinction is subtle but significant. The whole risk and materiality profile of ESG is where ESG goes beyond and differentiates from sustainability.

For example, A company may have a manufacturing unit that is renewable-powered, completely zero-waste, and carbon-neutral, but if that manufacturing unit is hazardous to work in terms of health and safety (i.e., employees are getting injured on the job regularly), the company is still not fulfilling its ESG commitments despite achieving environmental sustainability. The precise opposite can also be true. A company’s governance may be robust and thorough. Although it provides extensive ESG reporting, its primary business can be environmentally destructive.

Selling dumps into a nearby river may have solid financial accounting performance on records. However, anyone who views the company from the perspective of the ESG framework will be released.

(a) the company fails to account for the actual costs of its operations, and

(b) the business’s viability is jeopardized since the government may discover the wrongdoing and shut it down.

No ESG investor would invest in such a company. And this is increasingly becoming a danger for businesses. As billions of dollars shift to ESG, many ecologically or socially detrimental companies find obtaining financing for their operations challenging.

The Path from Sustainability to ESG

The movement from sustainability to ESG performance points to the growth of business practices and a more detailed measurement of a company’s performance. There is an excellent demand for improvement in collecting and tracking ESG management as the sector grows and becomes more sophisticated. Sustainability managers frequently work on environmental programs with outcomes that may be measured using comparable metrics like energy concentrations or gallons of water consumed. They engage stakeholders in these activities through advertising, marketing efforts, and surveys. Based on the results of these surveys, they formulate sustainability goals that may include aggressive carbon-cutting or offset initiatives in all aspects of their organizations.

These Sustainability efforts are related to ESG in that they (a) fulfil the particular outline of ESG and (b) are quantifiable. While quantitative indicators such as energy consumption are more easily scrutinized, there are several activities for which no policies exist. They are carried out at a particular time with documentation to prove they were carried out. These measures may bring value to a more sustainable organization. Still, these activities are far better documented at the implementation stage by viewing them through the lens of ESG instead of the broad umbrella of sustainability.

ESG has also become an increasingly important measure for capital markets. Organizations with excellent ESG performance have fewer hazards, greater returns, and are more robust. A comparison between ESG and sustainability may appear to be a matter of semantics. However, understanding the two words and focusing on what counts is critical in an ever-changing world. ESG highlights the pillars vital to business today, whereas sustainability is a broad word for a corporation that strives to do better.

ESG has grown increasingly crucial in ensuring the viability of economic, environmental, and societal systems in the future. Investors are also seeking that prioritize ESG performance. Therefore, noncompliance can result in significant losses. Sustainability is crucial because businesses are urged and expected to behave ethically and sustainably, and consumers are increasingly accustomed to environmentally friendly products and services. You may improve the handling of risks, increase competitiveness, and accomplish long-term financial success by embracing sustainable practices and investing in sustainable business models.

Bottom Line

Sustainability is a catch-all term for all or any of a company’s efforts to “do good.” ESG, on the other hand, focuses on three distinct pillars essential for today’s corporate executives and investors. While international corporate leaders undoubtedly recognize the importance of sustainability, most smaller organizations still regard it as a “nice-to-have” rather than a “must-have.” Companies are facing more scrutinizing queries about their performance in the ESG framework now that ESG has become a key criterion for judging a company’s performance. While most ESG disclosures are voluntary, these standards have become a continuous demand from critical stakeholders such as bankers and investors.

FAQs

Q1. Is ESG a good indicator of sustainability?

ESG metrics are a collection of diverse performance indicators, primarily of a nonfinancial character, that aid in evaluating organizations regarding sustainable and responsible practices.

Q2. What role does sustainability play in ESG?

ESG is a nonfinancial reporting structure encompassing numerous areas of sustainability. In contrast, sustainability is concerned with the social, economic, and environmental concerns that a company negatively influences and can, in turn, positively affect by changing how the firm works.

Q3. What exactly is sustainable policy?

A sustainability policy outlines your commitment to ecologically and socially responsible business practices and standards. It can be an overarching organizational guide or tailored to specific events.

Also Read: What Is Corporate Sustainability? And Why Is It Necessary?

 

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