Sustainability vs. ESG... What’s the difference?
by Wendy Schlett
In my recent conversations with business leaders and manufacturers, one question has been repeated: What is the difference between Sustainability and ESG?
While both terms have been around for a decade-plus, their infiltration into the marketplace is just now hitting a tipping point for companies of all sizes. Historically, the large multi-national companies were the only organizations truly dabbling in the nuances of these terms. Now, as these terms are maturing and entering mainstream markets and supply chains, more awareness and data drive the use and permeation of Sustainability and ESG.
Origins of the Term “Sustainability”
Starting with Sustainability, this is a term that was defined by the United Nations 1987 Brundtland Report, Our Common Future. In this report, the definition “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
The definition of Sustainability was intentionally broad, aiming to cover all industry sectors from agriculture to manufacturing to the built environment to product design. When this definition became prominent, many companies and thought leaders attempted to create ways to quantify sustainability. These efforts generated concepts such as the Triple Bottom Line (modifying the business model to consider people, planet, and profit), carbon footprint, regenerative capitalism, and conscious capitalism. However, with all of the intense thought and concept building around sustainability, many companies still struggled to implement actional goals and practices. Sustainability, in general, has been argued to be an over-used term that is too broad to generate meaningful progress.
History of the Term “ESG”
Then came the term Environmental, Social, Governance, or ESG. The first mention of ESG was in the 2004 United Nation’s Principles for Responsible Investment (PRI) report consisting of the report “Who Cares Wins.” The investment community latched onto the term ESG to screen investment in a business or company. Investors want to evaluate not only profit but also business behaviors to determine financial performance. Morningstar (Jess Liu) well presents a timeline on the history of the Sustainability and ESG concepts in this article: The behaviors the investment community is encouraging are those currently driven by market demand. According to a survey by Nielsen, “48% of consumers said they would definitely or probably change their consumption habits to reduce their impact on the environment and 83% of millennials indicate that environmental sustainability is extremely important to them.”
With market demand increasing for companies to address ESG, the investment community is responding with more quantitative measures to guide companies to create a strategic roadmap to address ESG risk. Recently the World Economic Forum (WEF) and the International Business Council (IBC) have established a set of 22 specific metrics for companies to report their results. These 22 ESG metrics are well defined and focus on impacts and governance efforts that a company can create objectives to achieve and include:
The ESG metrics are quantified to help corporations identify and minimize risk related to climate change and overall environmental impact, how they treat employees within their organization and their supply chains, and the safety and usefulness of their products. Essentially, the investment community’s emphasis on evaluating and screening investments for ESG is their response to the market’s desire to identify companies that minimize risk, maximize both values and profits, and are transparent with their efforts. With quantifiable metrics defined, ESG is becoming more actionable to companies than the broad initial concept of Sustainability.
A Rundown of ESG Reporting Frameworks
Several reporting frameworks exist to assist organizations in reporting ESG metrics consistently so the investment community can screen these efforts and make comparisons. These reporting frameworks have been developed and refined over time to point organizations in the right direction to implement efficient and pertinent reporting on ESG values. These reporting frameworks include:
Global Reporting Initiative (GRI): First created in 1997, GRI was the first and, currently, is the most used framework. This framework has been identified as one of the most holistic approaches as it encourages companies to work with stakeholders to determine how a company affects the world. Learn more.
Morgan Stanley Capital International (MSCI): This framework has been identified as the most aggressive; it uses a scoring system to measure long-term resilience and ESG risks. The MSCI ratings are more useful to institutional investors. Learn more.
Sustainability Accounting Standards Board (SASB): This is a framework specific to 77 industries, each with a set of financially material topics and associated metrics. This ESG framework has a bent toward the investment industry and is a complement to other ESG initiatives. Learn more.
Task Force on Climate-related Financial Disclosures (TCFD): The G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB) to review how the financial sector can account for climate-related issues. The FSB established a framework with four widely adoptable recommendations on climate-related financial disclosures applicable to organizations across sectors and industries. TCFDs recommendations and implementation strategies are in this 2017 report.
United Nations Sustainable Development Goals (SDGs): Adopted by member states in 2015, the SDGs address global challenges in the form of 17 goals aimed at creating a better future for people and the planet. The 17 SDGs bring more comprehensive awareness to a company’s risk, values, and efforts. The SDGs complement other reporting frameworks such as GRI, MSCI, SASB, and TCFD.
Many companies are communicating their ESG efforts utilizing the GRI framework to report, incorporating the United Nations SDGs throughout, and then attaching MSCI, SASB, and TCDF tables at the end to identify where in their report these metrics and values are described and measured. This allows companies to address all frameworks and provide the necessary transparent information the investment community and market demand.
At Foresight, we know embracing new business paradigms such as Sustainability and ESG is not easy. We also know it is by no means impossible to achieve with the right tools and support. Check out our business guide on Sustainability Reporting here.