Sustainability, environmental social governance (ESG) and corporate social responsibility (CSR) are terms that have become increasingly used interchangeably creating confusion amongst business and investors.
While all are terms that are widely used to describe corporate behaviour, they’re not interchangeable concepts with each concept differing in its overarching purpose, what risks are mitigated and what should be measured.
Here we discuss the differences between the terms and why NOW is the time for businesses to understand what these terms mean.
Sustainability
In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”.
From a broader perspective, sustainability refers to the ability to ‘maintain or support a process continuously over time’.
There is no defined sustainability framework but rather, it’s a broader principle which influences a company’s strategy and actions to remove or reduce adverse environmental, social, and economic impacts caused by business operations.
Corporate sustainability, therefore, can be described as the practice of operating a business in a way that meets the economic, social and environmental needs of the present without compromising the ability to meet its future needs.
More informally, the three pillars of sustainability are known as the ‘triple bottom line’:
– People (social)
– Planet (environmental)
– Profit (economic).
Sustainability is an umbrella term which ESG and CSR fall under.
Environmental Social Governance (ESG)
ESG is a quantifiable assessment of business practices using environmental, social and governance measures to assess the sustainability of a company.
The three pillars of ESG are considered to embody the major challenges facing businesses and wider society – climate change, the transition from a linear to a circular economy, increasing social and economic inequality.
The goal of ESG is to capture all the non-financial risks and opportunities presented in day-to-day business activity.
• Environmental
The environmental pillar measures how a business minimises its impact on the environment and considers factors such as:
– greenhouse gas, air, water, and ground pollution emissions
– energy reduction and using renewable energy sources
– waste reduction through recycling and reducing waste send to landfill as well introducing zero-waste products or sustainable packaging
– raw material sourcing
– biodiversity and land use
– animal treatment.
• Social
The social pillar considers how business practices impact fair and equal conditions for employees, the supply-chain, and local communities. Fairness and equality are at the centre of the social pillar which covers:
– health and safety standards
– employee training and well-being
– safety and quality of product
– privacy and data security
– sourcing policies to prevent abuses in the supply-chain
– responsible investment
– diversity and inclusion
– wider community engagement including volunteering and donations.
• Governance
The governance pillar considers the ethical accounting, financial reporting, leadership, and business practices. It’s specifically concerned with a company’s transparency about its practices and decision making behind them. It considers:
– accurate reporting on financial performance, strategy, and operations
– tax transparency
– ethical business practices such as anti-competition, anti-bribery, and corruption practices
– board diversity
– leadership accountability for risk management and performance
– executive compensation and bonuses.
Not all sectors /industries face the same ESG issues. For example, greenhouse gas emissions would not be as much a factor for financial services as for the manufacturing industry. This difference is called materiality, and companies report on issues that are financially material to them. These are issues that impact a company’s financial performance such as surplus costs, fines, loss of brand value from reputational damage or sales revenue due to consumer choice (resulting from socially material issues).
ESG was originally a framework for investors evaluate the sustainability related disclosures of listed companies. It demonstrated how a company was reducing risks and adapting practices and processes to meet future environmental legislation – demonstrating that the company was a good bet for longer term growth and therefore investment.
ESG’s popularity has grown in line with increased demand for transparency. While there is no standardised framework (yet) but ratings agencies like Bloomberg give companies ESG scores calculated using different sets of performance criteria.
Corporate Social Responsibility (CSR)
CSR is a self-regulated business practice that organisations adopt to improve their impact on society and the environment. A CSR business model helps a company be socially accountable to its employees, stakeholders, local communities, and the public.
CSR can be viewed as the precursor to ESG. It is the idealistic drive for sustainability, which larger brands adopted seeking to make positive contributions to society, and to drive the positive corporate, brand and employer brand associations.
CSR covers four categories, but unlike Sustainability or ESG, activity can vary widely as it isn’t required in all areas for a company to be considered socially responsible:
• Environmental
Much like Sustainability and ESG, environmental responsibility covers how a business reduces its impact on the environment.
• Ethical
Ethical responsibility is the pillar which considers fair and ethical treatment of customers, employees and suppliers.
• Philanthropic
Philanthropic responsibility is concerned with how a company contributes to society whether than be volunteering or donating money or resources to local charities or community issues.
• Financial
Financial responsibility ties together the above three pillars, but through the lens of financial investments to include spending on:
– research and development on sustainable innovation
– diversity and inclusion programmes
– training and well-being initiatives
– transparent financial reporting including audits.
The International Organization for Standardization (ISO) released ISO 26000, a set of voluntary standards meant to contribute to global sustainable development by encouraging business to practice social responsibility. It acts as guidance only, and as it is qualitative in nature the standards can’t be certified.
Why now?
Climate change, social inequality, and corporate misconduct are the global challenges of our time fuelling increasing demand for transparency on corporate behaviour from consumers, customers, employees and investors.
With extreme weather displacing millions across the globe in recent years, concerns around environmental sustainability have skyrocketed with new requirements on corporate practices being developed.
For example, in January 2023 the European Union’s Corporate Sustainability Reporting Directive (CSRD) came into force in creating new environmental, social and governance (ESG) reporting standards to start in 2025. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability.
In 2020, the UAE Securities and Commodities Authority (SCA) implemented specific ESG disclosure requirements. Article 76 of the Governance Code states that Public Joint Stock Companies on the Abu Dhabi Securities Exchange or the Dubai Financial Market must publish an annual sustainability report.
Increasingly, regulators are requiring organisations to increase transparency in areas such as carbon emissions and modern slavery. But beyond being prepared for any potential future regulation, implementing an ESG framework makes good business sense.
Stakeholders are increasingly informing their decisions based on a company’s ESG credentials. Consumers are buying products for their sustainability credentials; customers are choosing business for their ethical and climate change record.
Investors too, are evaluating businesses based on their ESG credentials.
With the upcoming Cop28 event, all eyes will be on the UAE, so regional business are being urged to create robust ESG reporting, to align themselves with global ESG objectives.
Conclusion
Sustainability is the umbrella term which captures the practice of operating a business in a way that meets the economic, social and environmental needs of the present without compromising the ability to meet its future needs.
ESG is a quantifiable assessment of sustainability, using environmental, social and governance criteria.
CSR is a self-regulated business practice, adopted by organisations to improve their impact on society and the environment.
ESG provides a clear path to sustainability. Going forward, businesses are likely to need the quantitative element of ESG to comply with regulation. But until then, business who elect to implement an ESG framework will stand to win the hearts, minds and business of consumers, customers, employees, and investors.
