What’s the difference between ESG and sustainability?
They are members of the same family, but the metrics that measure them are very different. Environmental, social and governance (ESG) is related to sustainability as well as corporate social responsibility (CSR). According to the Green Business Bureau, ESG is focused on how the world affects a company or its investments, while sustainability focuses on how a company affects the world.
The terms are often used interchangeably, with limited visibility into corporate objectives and metrics as well as a lack of transparency. This is where washing goes to turn green and where companies get hoisted on their petards if they wave reports vaguely over the ideas of ESG and sustainability rather than committing to clear objectives and achievements.
ESG and sustainability are now following the same visibility path as the protection of personal information. The European Union’s Corporate Sustainability Directive (CSRD) made ‘all large companies and all listed companies’ subject to rules around social and environmental information reporting. The goal is to create a culture of transparency, to ensure companies that fall under its mandate report the risks and opportunities they see around social and environmental issues and the impact they have on the environment and individuals. The rules have to be applied in the 2024 financial year, with reports due out in 2025.
According to the IEA, net-zero pledges are coming in thick and fast, but 40% of the companies making them don’t have a strategy in place to achieve them.
In the United States, the US Securities and Exchange Commission (SEC) outlined a climate risk disclose rule that, as McKinsey explains, will ask companies to ‘significantly increase their reporting on climate risk’. In South Africa, there are numerous regulations that outline ESG reporting and behaviours across multiple areas of business and different sectors. A comprehensive outline provided by the Bowmans law firm not only digs into the complexities of local ESG reporting, but unpacks how far ahead South Africa is compared to the rest of the world, particularly in the financial sector.
What is ESG?
ESG is a framework that’s used to assess an organisation’s performance across the metrics of environment, social and governance against clearly mandated criteria.
The environmental criteria cover energy usage, waste management, climate policies, supporting natural ecosystems and biodiversity, and reducing the corporate impact on the environment and resource usage. In the South African context, water scarcity and energy inefficiencies are environmental issues of concern. Thus, it is necessary that these challenges be prioritised in companies’ ESG frameworks.
The social criteria include communities, employees, consumers and stakeholders while tangibly implementing, or focusing on, diversity, inclusion, volunteering, and ethical behaviours and practices.
The governance criteria focus on ethics in financial reporting and accounting practices, board management, equity and inclusion, regulatory compliance, data management, and fraud, security and corruption. In the hierarchy of importance, the governance of the organisation is what matters here. For instance, an executive leadership team that is held to account for the execution of the organisation's strategy by an independent board led by an independent and impartial chairperson.
ESG reporting is, as defined by the Green Business Bureau, ‘the disclosure of data covering business operations related to the environmental, social and governance aspects of a business’.
Profit, people, planet
Sustainability is the umbrella that sits on top of ESG and is defined as the organisation’s ability to manage its ESG commitments and best practices from within. Sustainability is perhaps best described as the cogs within the business, turning the wheels of ESG and ensuring that it has the processes, policies and platforms in place to maintain an ethical business while still ensuring the business is making a profit and remains a success.
Sustainability also sits on three pillars, often known as the triple bottom line. Harvard Business School describes these as the three Ps: profit, people and the planet. You can see why sustainability and ESG are so easily interchanged with one another. Yet sustainability balances an organisation’s commitments to the environment alongside those to itself.
Is there value in ESG beyond the regulations?
There’s the fact that ratings agencies such as Bloomberg and S&P Global use ESG criteria to provide ESG scores that are then used by investors to make informed decisions around investments. This is perhaps the most obvious value of investing into a transparent and aligned ESG framework, but there are other benefits. Deloitte found that companies built on ESG foundations are ‘less exposed to the negative effects of technological or regulatory disruptions’, and that they tend to be more prepared for a crisis, can reduce the impact of an existing crisis, are faster to recovery, are more able to innovate throughout uncertainty, and demonstrate a long-term competitive advantage.
Visible and well-defined ESG also ensures that an organisation creates a culture of transparency that affects both the internal culture of the business, and its external relationships. It shifts the conversation from dark corridors and murky reporting that can become so much more than a PR nightmare as regulations become increasingly demanding of corporate compliance.
The greenwashing challenge
The different colours of green that define ESG and sustainability can come out in the wash. The number of court cases instigated by investors and other stakeholders challenging ESG reports and commitments is rising. As a recent Bloomberg report pointed out, there is growing legal pressure on companies to really walk the talk when it comes to sustainability and ESG. The same report unpacked the recent Shell debacle where the company was accused of ‘misrepresenting its renewable energy investment claims’. It joins the queue alongside Coca-Cola, Exxon Mobile, Nestle, Toyota, Lufthansa, H&M, HSBC, Mercedes-Benz and KLM, among many others that are currently facing legal action to substantiate their sustainability or ESG claims.
Just as ESG introduces value, greenwashing removes it. In its Predictions 2023: Environmental Sustainability report, Forrester believes that this year will see several companies fined $5 million or more for greenwashing after Walmart, BNY Mellon and Keurig saw fines of up to $5.6 million over the past two years. The problem is that companies are still making promises that they don’t know how to keep – according to the IEA, net-zero pledges are coming in thick and fast, but 40% of the companies making them don’t have a strategy in place to achieve them.
Delivering long-term value
Forrester believes that environmental sustainability is an opportunity. It is where the organisation can thrive by fostering innovations and taking advantage of opportunities that emerge from robust sustainable strategies. As the research firm puts it, ‘environmental sustainability has reached a tipping point’ with 61% of companies naming a sustainability lead. In its ‘From Greenwashing To Best Practices On Sustainability Communications’ report, the firm added that those companies with a commitment to responsible and ethical marketing, ESG behaviours and sustainable best practices are those that will experience a ‘lasting competitive advantage’.
ESG and sustainability are now part of every organisation’s journey, one that will change direction based on government, investor and stakeholder expectations, but that will equally deliver long-term value and benefits to those that pay attention and focus on the green, not the washing.
Environmental: energy usage, waste management, climate policies, supporting natural ecosystems and biodiversity, and reducing the corporate impact on the environment and resource usage.
Social: communities, employees, consumers and stakeholders while tangibly implementing, or focusing on, diversity, inclusion, volunteering, and ethical behaviours and practices.
Governance: ethics in financial reporting and accounting practices, board management, equity and inclusion, regulatory compliance, data management, and fraud, security and corruption.
Economic: how the business manages its strategies to ensure profits within a framework that minimises risks and unnecessary expenditure.
Social: community, employees, stakeholders, consumers and all other individuals impacted by the activities of the organisation and is committed to their ongoing wellbeing within the business context.
Environmental: biodiversity, resources, supporting the environment, and doing good business that prioritises the wellbeing of the planet.
Oh, how green thou art
Brainstorm: What defines best practice when creating an ESG framework?
Dipalesa Mpye, Tshikululu Social Investments NPC: There’s no universal standard or single framework when it comes to analysing a company’s ESG, which is what adds to the complexity of the ESG space. It’s important to ‘de-jargonise’ this space, especially when it comes to sustainability and ESG, which are often used interchangeably. ESG can very quickly begin to resemble alphabet soup, as demonstrated by all the acronyms as reflected on page 15 of the JSE guidance note.
Portia Maurice, executive: ESG and shared value, Telkom: We believe that ESG should define an organisation’s ways of working, and how it goes to market. It’s really an extension of our purpose as a business, and it’s as much about mitigating risk as it is about creating value-generating opportunities, using the assets we have.
Nikhil Naidoo, technical signatory, Remote Metering Solutions: Strategies and systems need to be in place to allow for information-gathering and evaluation such that the company’s ESG performance can be properly reported and monitored.
Teboho Makhabane, head of ESG and impact, Sanlam Investments: A good ESG framework is one that allows a company to think through ESG risks and opportunities. I believe that’s a holistic approach to ESG and speaks to sustainability.
Chris Blair, CEO, 21st Century: Link executive pay to achievement of the ESG goals in a transparent and meaningful way, either through applying 15% or more of the variable pay `pot’ to executive scorecards or by introducing qualifiers or moderators to the executive incentive plans, both short-term and long-term.”
Brainstorm: Why do you believe that ESG and/or sustainability best practices deliver value?
Tiaan Kotzé, chief operating officer, Omnia Group: In doing business the right way, businesses not only grow revenue, but also attract talent and build strong relationships with host communities through social credibility. The implementation of good governance, regulatory and standards of practice drives the development of strong institutions, communities and countries.
Charissa Jaganath, head of responsible business, Datatec: To strengthen momentum and accountability, we have also linked ESG outcomes and goals to performance, introducing key performance indicators (KPIs) for our regional CEOs.
Minnette le Roux, head of environmental department and principal environmental specialist, NSDV: ESG is essentially a key driver in measuring a company’s progress and maturity. Government incentives and taxations are rapidly moving to incorporate ESG scores, and JSE-listed companies are required to disclosure their ESG impact, obliging companies to incorporate ESG into their business models.
Byron Kennedy, executive head: group media relations, Vodacom: By considering ESG risks and opportunities in strategic and business planning, organisations can minimise/mitigate the ESG risks while delivering the value they bring to customers, investors and the communities in which they operate.
Warren Winchester, general manager, ventures, Fedgroup: We believe investors can’t invest without taking these principles into consideration and if they don’t, their investments are not likely to perform in the long term. By subscribing to these sustainability practices, companies are essentially contributing to the growth and restoration of the economy, which has a knock-on effect on all the other aspects of our country.
Esenthren Govender, solutions executive, Technodyn International: Transparency in business operations enables risk assessment, attracts investors and financing opportunities, and allows easy response to regulator changes. This is essential for every company seeking to stay competitive or stay on top of their sustainability goals.
Elisa Moscolin, EVP, sustainability & foundation, Sage: Employees want to work for companies that consider the environment and the community, which results in increased engagement and talent retention.
* Article first published on brainstorm.itweb.co.za