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What is ESG and what is sustainability? At first glance, they seem to be closely related. ESG stands for Environment, Social, and Governance, which is a broad set of topics that cover climate action, carbon accounting, employee relations, social inclusion, executive compensation, board governance, etc. It is a rather complete set of non-financial activities that a business might want to be concerned about as it goes about its operations. Sustainability, on the other hand, resonates well with businesses as they think about a long-term strategy to build their company for the next century, for example. For a company to last, it needs not only to be concerned about short-term profits but also about its long-term reputation and relationships with its suppliers, distributors, customers, and a wide network of business relations.
One clear and easy way to delineate between the two is by the professionals who practice ESG or sustainability. As discussed in the previous blog, ESG is a term created by a coalition of investment professionals who designed a framework to expand the scope of consideration when making investment decisions. These banks and investors are looking to incorporate additional evidence of a company’s long-term outlook to supplement the current set of evidence, which is primarily based on financial metrics. Thus, ESG is primarily a financial concept.
Sustainability, on the other hand, arises from the concept of Sustainable Development. There are many definitions of Sustainable Development, but the most frequently quoted is from the UN report “Our Common Future,” also referred to as the Brundtland Report. It defines Sustainable Development as “…development that meets the needs of the present without compromising the ability of the future generations to meet their own needs.” It is linked to the 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs). Leading companies that envision a lasting presence are embracing sustainability as a key pillar of their vision. This strategic emphasis on sustainability had led companies to examine their conduct and relationships with external stakeholders and to start to report on the various aspects of sustainability.
How does ESG meet Sustainability? Both ideas originate from the awareness that finance and business have broader societal mandates than merely being concerned with next quarter’s profits. From the investment lens, this means a more comprehensive set of metrics to evaluate a company’s financial and non-financial health. ESG is the acronym for this set of metrics. From the business lens, in order to continuously deliver shareholder value and build a lasting company, sustainability is a principle that should be integrated into every practice and activity. Thus businesses should set and report sustainability metrics, and investors should incorporate these metrics into investment decisions.
Two separate movements are meeting where metrics and measurability are concerned. The ESG advocates need better metrics to evaluate businesses, and businesses need better metrics to track their progress on sustainability. Increased transparency of these ESG or Sustainability metrics would enhance the long-term operations of businesses and allow investment professionals to make better financing decisions.