ESG and sustainability, what’s the difference and why you need to know
The rapid growth of ESG and sustainability has created confusion of definitions, which is resulting in incoming legislation and CEO anger. Given the amount of time, money and resource being invested in this area, if we don’t get clear on definitions, much of that time might well be wasted.
ESG is at the top of the agenda, but few are sure what it is
After fining BNY Mellon for misleading ESG claims, the SEC is preparing to crackdown on other potentially misleading ESG investment claims. Tesla gets cut from the S&P 500 ESG Index and Musk vents on twitter. These are just a few of the events of recent weeks. All are underpinned by the lack of clarity on what ESG actually is.
ESG is mistaken for sustainability
Musk’s ire was spiked because Tesla’s business is about building the next generation of sustainable cars, but this doesn’t count in ESG metrics. Hence getting cut. ESG metrics are measures of how well a company manages its myriad of environmental, social and governance impacts. Tesla hasn’t published any details of its low carbon strategy, and there have been several issues around working conditions and deaths and injuries from autopilot technology.
Musk thought his ESG score was a measure of how sustainable his company is ie how much the business contributes to environmental and social progress. ESG metrics aren’t this. ESG metrics are a measure of how a company manages the risks of environmental, social and governance issues. The risks to its business and shareholders, not the risks the business creates for the outside world, to people and planet.
ESG has become synonymous with the concept of sustainability. Probably because it deals with the same issues, but from very different viewpoints. ESG is all about the company. Sustainability is about the world at large and the company’s impact on it and contribution to it. The term sustainability is a shorthand for ‘sustainable development’ which was first coined in 1987 by the Brundtland Commission. It defined sustainable development as ‘development which meets the needs of the present without compromising the ability of future generations to meet their own needs.’ ESG comes from the UN’s Principles for Responsible Investing.
ESG is about managing how you do what you do better. It’s about more efficiency and better management to reduce the risks and impacts. Think management, measurement and step-by-step change.
Sustainability is about changing what you do, so it is better for the world now and into the future (remember the definition). Think business models, strategy and step-changes.
A mistake easily made, given the complexity
The same issues sit under each concept. They are many and complex. Issues as diverse as carbon equivalent emissions, energy supply and intensity, supply chain labour rights, waste, whistle-blowing, worker safety, board diversity, issue oversight, compensation, parental leave policies, tax, ethics and corruption to name just a few. ESG raters analyse around 700 data points per company, and it’s not unheard of for companies receiving 300-400 page questionnaires.
Because the issues are the same, the concepts themselves are seen as the same too, because both are, from one perspective, about making business’ impact on the world better. Just at fundamentally different levels of ambition and outcome.
Businesses that don’t understand the distinction will focus on the most urgent things, where they can more easily measure progress – ESG. This will be fine in the short term, but sooner or later, those that have clearer stories about what they’re doing, why and how, will pull ahead.
Those with a clearer story will be able to decide how much they invest in increasing their ESG scores and in innovating to change their business model, to make it more sustainable. They will be able to attract better talent with stories of innovation and a clearer view of the strategic role they play in society. Clarity that comes from really understanding what they are doing and why. Hopefully you’re clearer now, but is the rest of your business?
If you’d like help with your sustainability story, get in touch.