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Terminology related to sustainability can be confusing. Here’s a brief explanation on how the various terms differ.
Sustainability and ESG (Environmental, Social and Governance) are now commonly being addressed in boardrooms, assessed by investors, and reported on by companies.
They are both important, strategic considerations for businesses, and there is no doubt that managing these concepts results in improved organizational performance.
While there is some overlap, there are also distinct differences. So how do they differ, and why are they important to companies and investors?
Sustainability and sustainable development
Development needs to be sustainable to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs [1].
UNESCO indicates that sustainable development comprises four dimensions – society, environment, culture, and economy – which are intertwined, not separate. The UN has developed 17 goals in this regard.
Sustainability, in its broad sense, consists of the management of three dimensions: (1) environmental, (2) economic and (3) social, in pursuit of a decent quality of life.
UNESCO formulated a distinction between the two concepts as follows: “Sustainability is often thought of as a long-term goal (i.e. a more sustainable world), while sustainable development refers to the many processes and pathways to achieve it.”
In other words, sustainable development is the strategy in achieving sustainable outcomes.
In order for humanity to be sustainable i.e. to endure, we need to manage our impacts such as air pollution (generating energy in a clean manner), water contamination, biodiversity loss, and soil health degradation (to ensure sufficient arable land).
For a business to be sustainable, it not only needs to manage its environmental impacts, but needs to ensure that it remains economically viable and manages its social aspects as well, including both internal and external stakeholders.
What is ESG?
Environmental, Social and Governance (ESG) is more related to risk and is used primarily by investors to gauge performance and risk levels, which in turn pertain to the financial return of a business.
Examples of these risks which would potentially deter investors include excessive pollution (E), harmful working conditions (S) or financial irregularities (G). Basically, it’s investment institutions which represent the interests of people like you and I, driving a forum of sustainability via E, S and G principles.
The fact that ESG tends to be more externally driven should not deter companies from considering, identifying, and managing their ESG aspects, as it has now been proven that these non-financial indicators lead to more resilient, profitable, and sustainable companies.
There are various standards and frameworks that guide investors on the specific metrics and indicators to track, with various scoring methodologies to ascertain the ‘health’ of a business from an ESG perspective.
We can therefore say that one of the key differences between ESG and sustainability is that ESG is about company strategies and performance, which include sustainability, and which if left unattended, could result in a business collapsing.
An example of this would be if a company has sound environmental practices (i.e. manages carbon emissions and has very little environmental impact), it may be considered environmentally sustainable.
However, if it does not focus on a healthy and safe workplace, or disregards community concerns, then ESG assets are not being managed properly, to the organization’s overall detriment.
ESG performance therefore needs to be managed alongside and considering sustainability, but includes more than just sustainability itself.
Sustainable investing and impact investing
Sustainable investing relates to ESG and is the practice of making capital allocation decisions based on socially responsible and ethical strategies, to ensure that the companies invested in maintain a high standard of sustainability principles.
It is a process of determining if an organisation has positive ESG metrics, with no negative ones. Sustainable investing doesn’t ignore the foundational concepts of investing, but additionally considers ESG factors in how value will be created.
Impact investing is similar, but with distinct differences. It looks more at the actual products and services of an organization and aims to generate specific social or environmental effects, in addition to financial gain. Essentially, the concept is to use investment to leverage positive social results.
[1] World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1987)
