ESG vs. Sustainability – What’s the Difference? Why is ESG Important?

Many times, you might have heard sustainability and ESG in the same sentence – in some cases even see them used interchangeably.

In a way it makes sense as both address the environmental and social aspects, but there are dissimilarities between the two regarding benchmarking data and disclosures. As a Company Secretary its necessary to be aware of differences between these two initiatives — especially when you’re accountable for implementing them in your organization.

So, what does these two concepts mean and how they differ from each other? And, does it matter? Let’s dig in to find out.

What is Sustainability?

Since the last decade, sustainability has become synonymous with “reducing your carbon footprint” or “going green”. Due to which, when people think sustainability, they assume about things like reducing consumption of fossil fuels and energy and tracking emission of carbon & other greenhouse gases.

However, that’s a narrow definition of sustainability. Sustainability is an umbrella term of “doing good,” that includes all the ethical and responsible business practices of a company to reduce its impact on the world. It incorporates terms like ‘green’ activity, corporate social responsibility (CSR), net zero and low carbon footprint, conservation of energy, water and resources, circularity, diversity and inclusion, human rights, green supply chain, health and safety, product stewardship etc.

The 3Ps of sustainability, is a renowned business concept; also, often referred to as the triple bottom line. The Ps denote to People, Planet, and Profit. It requires a company to include people and the planet along with the profit line on its balance sheet. Sustainability plays a crucial role in protecting and maximizing the benefit of the 3Ps. Green initiatives take care of people. They concede with the planet’s needs by respecting its treasured resources, and they aim to yield profit without waste.

Furthermore, sustainability may mean different things to different organizations. Activities that fall under the sustainability umbrella depends upon company and its activities and generally could include:

• Going paperless
• GHG accounting
• Procurement of energy efficient office equipment
• Waste auditing
• Offering paid volunteer days
• Retaining DEI (diversity, equity and inclusion) consultant to appraise company practices
• Hosting a public stream or highway clean up

Sustainability programs allow organizations to get creative and discover opportunities and actions that fit for them and their employees. Some organizations may even take the opportunity to measure targets and the progress, while some will take up new initiatives every year.

However, due to vast opportunities and lack of guidance; companies struggle to get their arms around such a broad concept. Due to which, sustainability has never been truly integrated into most organizations. As many have a vague idea of what they are required to do, and also struggle to quantify and report on performance.

What is ESG?

ESG is much more precise and data-driven rather than just “going green” or being a responsible steward. ESG is an acronym of Environmental, Social, and Governance. ESG is mainly is a corporate governance and investment framework. Practically, companies that adopt ESG principles consider, quantify, report and work to improve the environmental, social, and governance aspects of their business alongside its financial considerations (profit, growth, expenses and accounting).

Three pillars of ESG

E – Environment – Denotes how companies reduces their environmental impact that has extensive consequences on the society it operates and the planet. This ESG category basically incorporates the description of corporate sustainability — balancing the environment, economy across products, energy usage, packaging, facilities, people, and waste in a way that doesn’t contribute to climate change, global warming, and biodiversity loss — through corporate decision-making and investments.

S – Social – Denotes how a company look after its people and contributes to their all-encompassing growth. Their diversity and inclusivity will pave the way for a sustainable future.

G – Governance – Denotes how companies ensures compliances, along with transparency and best industry practices, and bidding with regulators. It also governs the internal system of practices, procedures and controls to make effective decisions. ESG is a methodology that allows organizations to measure and report on their impact through three lenses as defined below:

ENVIRONMENT	SOCIAL	GOVERNANCE
Energy consumption Water stewardship Waste management Air quality Climate change Biodiversity Deforestation Sometimes “Sustainability” lives here.	Gender inclusivity Diversity Hiring practices Customer satisfaction Data protection Human rights Labor standards	Board composition and membership selection Executive compensation Shareholder rights Accounting and auditing procedures Ethics, bribery and corruption policies Lobbying and political contributions

The Difference Between ESG and Sustainability

Although ESG and sustainability have similarities and share the same goals, there’s one main difference: sustainability is vague, and ESG is precise and quantifiable. While sustainability can mean different things to different organizations, ESG provides a detailed set of criteria — namely, environmental, social, and governance — that organizations can measure and report against.

Key differences between ESG and sustainability:

1. ESG is about company identity, decision-making and stakeholders — the CEO, board, shareholders, employees, and other stakeholders — whereas sustainability is all about the relationship between a company and the environment.

2. ESG embraces sustainability as one of its three components, but also combine bigger picture with social and corporate governance considerations.

3. ESG is practically more appropriate for large organizations who are listed on public exchanges or who need funding from institutional investors. However, nowadays many banks and financial firms themselves are adopting ESG principles, due to which ESG is also progressively becoming more substantial to startups and smaller companies also.

4. ESG is an investment framework that assists external investors to evaluate company’s performance and risk associated, whereas sustainability is an outline to make internal capital investments (i.e., taking up energy efficiency measures like installing LED light bulbs or purchasing sustainability measurement software program)

5. ESG is based on benchmark set by policymakers, investors, and ESG reporting organizations (e.g., GRI, MSCI, TCFD), whereas sustainability standards — while also set by standards assemblies like GHG Protocol — are standardized and more science-based. There are lots of different frameworks for measuring ESG, whereas carbon (CO₂) is carbon and sustainability standards not that creative.

The Ultimate Difference Between ESG and Sustainability

Ultimately, the simplest way to differentiate between ESG and Sustainability is in impact lens:

ESG looks after how the world influences an investment or a company, whereas sustainability emphases on how a company (or investment) influences the world.

The difference is elusive, but important.

This is where ESG goes beyond and differs from sustainability is in overall risk and materiality profile of ESG.

For example: A company could have a manufacturing unit that is renewable-powered, completely zero-waste and carbon-neutral, but if that manufacturing unit is wildly dangerous to work in from a health and safety standpoint (i.e., employees are getting wounded on the job every time), the company still isn’t fulfilling its ESG commitments despite, achieving environmental sustainability on records.

The exact opposite can be true as well. A company may have strong governance and very detailed and exhaustive ESG reporting, but its principal business can still be harmful for the environment.

For example: If a company earns profit from manufacturing toxic poison, then all the product that it couldn’t sell dumps into the neighbor river, it possibly will have good financial accounting performance on records. But anyone who view company via lens of ESG framework will release

(a) the company’s not reckoning the real costs of its business, and

(b) the business viability is at stake, as the government might notice the wrong doing of it and shut it down.

In such a company no ESG investor would invest. And that is itself more and more becoming a risk to companies: as tons of investment in dollars transition to ESG, many companies which are environmentally or socially harmful are finding it difficult to get finances for their business.

The way forward from Sustainability to ESG

Change is virtuous: The evolution from sustainability to ESG performance point towards a development of business practices to a more detailed measurement of a business performance. As the industry growing and becoming erudite; there is a strong need for improvement of the ways we collect and track ESG management.

Often sustainability managers work on environmental programs targeting results that can be tracked using conversant metrics like energy concentrations, or gallons of water consumed. They bring participation of stakeholders through campaigns, marketing efforts and surveys in these initiatives. And with the results of these survey, they develop sustainability targets which may include aggressive carbon-cutting or offset efforts concerning all aspects of their organizations.

These Sustainability initiatives are similar to ESG is that they (a) fit into the specific description of ESG and (b) are quantifiable. While measurable metrics like energy consumption are more easily scrutinized, there are various initiatives for which policies don’t exist, and are executed at a specific time with documents to verify they were enacted.

All of these steps may add value for a more sustainable organization, but at the stage of implementation, these initiatives are far better reported by examining them through the lens of ESG rather than the far-reaching umbrella of sustainability.

ESG has also turned out to be an increasingly significant metric for capital markets. Organizations with high ESG performance have demonstrated to have lower risks, higher yields, and are more robust in times of crisis.

How do ESG policies can benefit your organizations?

 More and more organizations are getting familiar with the multifarious and accessible benefits of ESG like targeting potential consumers, attracting talented forces, enabling innovation and brand-enhancement. Overall, ESG arms the organizations to become robust in the current and probable future circumstances. Some of the major benefits in detail are listed below to know why ESG is more important now than ever:

1. Make ways for the exceptional growth: For businesses with strong ESG approach, it’s easy to enter new markets and expand their operations as they get support from all the stakeholders. Government also facilitates the ESG Complaint organizations by giving permissions and licenses without hustle.

2. Leads to reduction in the costs: Organizations who opt for more sustainable ways for productions tend to be more efficient and reduce their costs. For example: Nestlé, has announced recently that by 2025 it will invest up to USD 2.1 billion to shift to food-grade recycled plastics from virgin plastic packaging to and the progress to other sustainable packing solutions. This step will not only result in cutting down the carbon footprint but also save non-compliance costs that it has to incur among different geographies where it operates and where law is strict for use of plastic for packaging.

3. ESG Investors are “long-term”: ESG investors are values-oriented investors who are more interested in what happens during the upcoming decade than the upcoming quarter; they understand that change takes time. ESG investors often work alongside an organization to strengthen it, as they are more interested in building long-term value over a decade than in flipping the stock in the next year itself. Even the customers stay loyal to such brands. According to recent survey by Gen Z Shoppers Demand Sustainable Retail, the huge majority of shoppers at Generation Z choose to buy sustainable brands, and they are ready to spend 10% more on sustainable goods.

4. Active management of stakeholders and governing compliances: All types of businesses regulated by some or the other governing body and its regulations in the market they operate. Those organization which has strong ESG measures particularly on Governance, invite less scrutiny from the regulators and have more operative freedom. They also face less pressure from employee and trade unions, activists protesting for climate change etc.

5. Attracting talent and increasing employee’s productivity: It must be noted that good ESG scores attract better talent and have extended retention. Having a clear sustainability plan boosts an internal sense of pride among employees. The newer generation chooses to work for organization with stronger commitments towards society and the world at large.

How should you start working on your organization’s ESG policies?

An organization must take into consideration different factors while determining its ESG policies. To start with an organization must evaluate where it stands when it comes to adopting ESG measures. Is it just at initial stage, or has it already taken few steps towards ESG. This assessment will help to answer some key questions such as:

If you are just starting to adopt ESG policies for your business –

• Determine the most crucial zones where ESG needs to focus on
• Study and know about different ESG frameworks, standards and policies
• Conduct a survey among your board, investors, employees and customers which helps to find priority areas for ESG
• Allocate budget and outline strategies with accountability measures

If your organization has already taken few steps in developing ESG measures and gone beyond the above steps –

• Check for your business’s industry standard ESG benchmark and become participant to applicable standard and reporting frameworks
• Carry out your ESG measures through other internal assessment and make sure it coincides the required guidelines
• Make sure your ESG strategy comply the essential operating and governance model as stated by the investors and existing compliances
• Stay updated with the varying regulations, and requirements of your stakeholders
• Participate with other organizations, Govt. officials, stakeholders and associations to build relationships and increase the rate of progress towards larger impact and determining better ESG practices

Organizations which are decidedly committed towards their ESG policies, make it a significant for the senior management and tie compensation to ESG metrics. According to a report in in January 2021 of Pay Governance, 29% organizations have counted in ESG metrics in their incentive plans compared to 22% in 2020.

The organizations are reporting ESG goals, and progress towards them, to all stakeholders via the internal corporate communications, annual reports, and/or sustainability reports on their official website.

Your takeaway as a CS

Sustainability is an umbrella term—a set of all or any of the company’s efforts to “do good.” ESG, on the other side, focuses on three definite pillars that are vital for today’s corporate managers and investors. While international corporate leaders no doubt identify the significance of sustainability, most of the smaller organizations still interpret it as a “nice-to-have” rather than a necessity.

Now that ESG has become an important criterion assessing a company’s performance, companies are facing more judicious questions about their performance in ESG framework. While most ESG disclosures are voluntary, these benchmarks have become a consistent requirement for key stakeholders, including bankers and investors.

So, what’s the way forward? Gradually, organizations will be required to ensure that they have accurate ESG reports available for investment decisions. To attain ESG Investment Grade Data, companies must collect information that is correct, complete, timely and auditable.

Further the fact that ESG Framework brings confirmed value to the organization gives you an opportunity to have a serious talk to senior leaders about safety, environmental, and compliance issues in a strategic way. They will have to agree as you’re offering the evidence-based benefits, not feel-good green initiatives.

By confirming that environmental and social programs are an integral part of the organization’s strategy and involved in its overall goals, a Company Secretary can validate the necessity of focusing on the environment, people, and governance to ensure the overall success of the organization.

Not only that, but it allows environmental and governance experts to place themselves as someone who can encourage performance and profits in the big picture — thus ensuring a seat for themselves at the board.