In the modern business landscape, “sustainability” and “Environmental, Social, and Governance” (ESG) are commonly used buzzwords that are typically regarded as interchangeable. However, for chief financial officers (CFOs) and financial controllers, it is critical to understand the nuances and subtle differences that distinguish these two important concepts.
What Is Sustainability?
Sustainability refers to the practice of managing your business in a way that satisfies its current environmental, social, and economic needs without undermining the ability of future generations to meet those same needs or access natural resources.
Corporate sustainability focuses primarily on operating a business in a responsible, ethical, and sustainable manner. To that end, businesses should improve the communities that they operate within by providing jobs, preserving natural resources, and minimizing greenhouse gas emissions.
The social aspect of sustainability deals largely with promoting diversity and equity in the workplace. Organizations must embrace fair labor practices, protect and respect fundamental human rights, and be engaged with the communities they serve.
Lastly, the economic aspect of sustainability focuses mostly on achieving short and long-term financial goals, ensuring the responsible allocation of resources, and creating enhanced economic value.
Investors, stakeholders, and prospective business partners will often examine whether an organization is exhibiting corporate, economic, social, and environmentally sustainable practices, but there are no standardized ways through which sustainability can be properly measured. With that being said, that is where the ESG framework comes into play.
Learn more about sustainability in finance.
What Is ESG?
ESG is a framework used to evaluate the efficacy of the environmental, social, and governance processes of a business. You can consider it to be a detailed subset of sustainability that includes economic considerations.
The primary purpose of ESG is to provide investors and stakeholders with insights into your company’s impacts on the environment and society so that they can decide whether they want to work with your organization.
From an environmental standpoint, ESG considers factors such as waste management, water conservation, energy efficiency, and greenhouse gas emissions, while the social component of ESG focuses on how your business interacts with its employees and the community it serves. Factors to consider include employee diversity, labor standards, and the upholding of human rights.
The governance component of ESG considers how your organization ensures that it acts in the best interests of its stakeholders. Some factors at play include compensation, risk management, board diversity, and ethics.
By analyzing these various criteria, assessors will create an ESG rating, and though participating in ESG assessments is voluntary, many major players consider the ESG performance of a business when determining whether to invest in it. As such, proactively improving your ESG performance can have reputational and financial benefits for your organization.
Key Differences Between Sustainability vs. ESG
Sustainability and ESG are two interconnected, albeit separate, concepts. Sustainability is the broader of the two, focusing on the social, corporate, economic, and environmental repercussions of an organization’s business activities. Be that as it may, it is a broad principle that is not quantified using any standardized set of metrics or criteria.
ESG, on the other hand, is a far more narrow framework that evaluates the performance of companies based on environmental, social, and governance factors. It uses a set of standardized criteria to assign companies an ESG score, which is then used by stakeholders and investors to assess the company’s overall impact on the environment and society.
The fundamental difference between sustainability and ESG is that the former is a wide-reaching principle that addresses a dynamic array of best practices and concepts, while the latter is a specific tool that is internationally recognized as a viable means of evaluating a company’s performance in specific areas.
Due to the ubiquity of ESG scoring systems and their growing popularity among investors, it is vital that your organization implements proper ESG policies so that it can achieve measurable performance enhancements. By integrating them into your organization’s underlying operational principles, you can attract top-tier investors, differentiate yourself from less socially or environmentally-conscious businesses, and continue to thrive within your industry.
Final Thoughts
For CFOs and financial controllers, it is vital to understand the core concepts of both ESG and sustainability, as well as how ESG is becoming increasingly prevalent both domestically and at the international level. Investors are proactively seeking companies that make ESG a priority. As such, your organization must have an ESG framework in place if it wants to ensure it is appealing to top investors.
While sustainability is not as large of a priority for some investors, governments and regulatory entities the world over are holding businesses accountable for the environmental repercussions of their activities. Therefore, your business must operate in an ethical and sustainable manner.
In any case, as a financial professional, it is your responsibility to ensure that ESG and sustainability-related expenses are accounted for in your organization’s budget. By embracing these practices, you can reduce your company’s carbon footprint, attract top investors, and strengthen your competitiveness.
