Sustainability and ESG What's the difference

In the face of global challenges, society increasingly demands that businesses should have a governance framework in place to enable them to be good stewards not only of financial capital, but also of natural and social capital as well.

While both ESG and sustainability are concerned with the environmental and social impact of business, they have different goals and priorities.

ESG is a framework used to evaluate the performance of companies across specific areas such as carbon emissions, diversity and inclusion and executive pay, and is used to identify and manage specific risks and opportunities associated with a company or investment.  Conversely, sustainability provides a broader holistic approach for long-term value creation that encompasses a range of responsible and ethical business practices across areas such as supply chain management, stakeholder engagement, and community development.

Sustainability aims to balance economic, social, and environmental aspects for the long-term well-being of present and future generations. While ESG is a specific framework used to assess the environmental, social, and governance performance of companies, investments, or projects.

Recognising the distinction between these two concepts helps stakeholders (businesses, investors and policymakers) to make better-informed and more effective strategic decisions, ensure compliance with regulations and engage shareholders to address their concerns and create shared value.

Performance measurement and reporting also differ for both concepts. Sustainability and ESG are subject to different regulatory frameworks and voluntary standards.

Sustainability definition

Corporate sustainability encompasses a range of responsible business practices used to operate a business without harming and preferably improving, the environment, society or the economy (Do-No-Significant-Harm).

It goes beyond financial considerations and is a holistic concept that incorporates:

• Environmental stewardship – reducing negative impacts on the environment by minimising greenhouse gas emissions, waste, and pollution, and conserving natural resources.
• Social responsibility – promoting social equity, diversity, and inclusion through fair employment practices, health and safety, human rights, and community involvement.
• Economic viability – ensuring long-term prosperity.

Environmental Social and Governance (ESG) definition

Business success today is measured beyond traditional financial performance metrics. Driven by society’s recognition of the value of company ethics, values and impact, businesses are seeking ways to effectively measure their impact on society and the environment.

ESG is a standardised management and analysis framework that enables organisations and other stakeholders such as investors to understand and measure their impact on these factors, as well as its corporate governance practices.

The goal of ESG is to capture the non-financial risks and opportunities inherent to a company’s day-to-day activities. Understanding these concepts helps businesses operate responsibly and sustainably.

The criteria measure a business’ impact across three key framework pillars using benchmarks and metrics:

• Environmental – how the business affects and safeguards the environment.
• Social – how the business interacts with its stakeholders (employees, customers, suppliers, communities, investors).
• Governance – how the business is managed and governed.

Why the two get confused?

The concepts of sustainability and ESG (Environmental, Social, and Governance) are often interlinked, but they are distinct.

Whereas sustainability is an umbrella term that encompasses responsible environmental, social and governance considerations, ESG specifically refers to a subset of sustainability criteria within these three areas that are used to evaluate the performance and behaviour of companies.

While both sustainability and ESG aim for responsible business practices, ESG provides specific benchmarks and metrics, whereas sustainability is a broader principle.

Organisations that are committed to sustainability use ESG criteria to measure their performance, make informed decisions and to report against.

Understanding these concepts helps businesses operate responsibly and sustainably.

ESG

ESG (environmental, social, and governance) pillars form the framework against which an organisation’s performance is measured. Despite increasing demand for ESG-related information, there is no standard ESG framework, only a broad consensus on the issues covered by it.

The environmental factor

The Environmental pillar focuses on how a company acts as a steward of nature, focussing on an organisation’s environmental impact and risk management practices. This includes:

• Resource usage and conservation – stewardship of natural resources such as water, energy, use of virgin or recycled materials in production processes and how a company ensures optimum levels of engagement in the circular economy.
• Emission management – direct and indirect greenhouse gases and carbon, air, water and ground pollution emissions.
• Resilience against climate change risks (hotter temperatures, flooding, fires).
• Waste management.
• Land use concerns – deforestation and biodiversity disclosures.
• Treatment of animals.
• Compliance with environmental regulations.
• Positive sustainability impacts offer long-term business advantage.

From a reporting perspective, this is the most complex pillar.

The social factor

At its core, the Social pillar is about human rights and equality – an organisation’s relationships with people, as well as its policies and actions that impact individuals, groups, and society.

In a business context, it examines all people interactions against principles of ethics, justice, and wellbeing. This can include how an organisation treats its employees and its impact on customers, partners, and other stakeholders. Topics covered under ESG social include inequality, working conditions, employee development, wellbeing and engagement, human rights, diversity, product safety, community relations, and supply chain transparency.

Metrics against which a business may be measured include human capital management (HCM) metrics (like fair wages and employee engagement) but also the organisation’s impact on the communities within which it operates.

Society increasingly demands that social impact expectations and reporting extend outside the immediate company to supply chain partners, particularly those in developing economies where environmental and labour standards may be less robust.

Organisations that successfully adopt the social pillar of ESG recognise that business operates within the context of a society that is intrinsically inequitable and that they have a responsibility to address the inequities within their control.

The governance factor

The Governance pillar is critical to evaluating organisations, focusing on how they are led and managed. ESG governance assesses how responsibly and ethically a company operates. Key aspects of ESG governance include:

• Board diversity – a diverse board that represents different backgrounds, skills and perspectives to encourage better decision-making and risk management.
• Executive benefits – good governance includes transparent and fair executive compensation practices, an alignment between executive pay and incentives and stakeholder expectations of sustained company performance.
• Shareholder rights – respect for shareholder rights (transparency, accountability, and ensuring shareholders have a say in major decisions).

It also includes matters of corporate behaviour such as anti-competitive practices and corruption.

Why should you consider ESG for your business?

ESG compliance is good for business. Increasingly organisational stakeholders, from investors to employees and customers, place considerable value on ESG performance. Businesses that understand and improve their ESG performance see a virtuous circle of benefits, ranging from improved financial performance, enhanced reputation and branding, to reduced risk of regulatory non-compliance.

Benefits of ESG implementation include:

• Competitive advantage – research by PwC, found that more than three-quarters of customers would buy from businesses prioritising ESG, while McKinsey found that customers are willing to pay more for environmentally friendly products.
• Risk management – understanding, identifying and managing risks related to environmental impact, social issues, and governance practices and issues enables informed decisions aligning with broader objectives and reduces the risk of potentially costly issues.
• Performance – investors and lenders recognise that businesses with strong ESG performance tend to deliver better long-term returns, making ESG key to securing capital as investors seek to invest in companies with a positive impact on society and the environment. Lack of ESG compliance can severely impact investing. According to the CBI, two-thirds of institutional investors consider ESG performance when making investment decisions.
• Sustainability – ensures a more resilient business model, responsible resource use, lower energy consumption, waste reduction and environmental stewardship.
• Recruitment and retention – sustainability performance is a key factor in both attracting and retaining top talent.
• Innovation – encourages innovation by driving companies to find sustainable solutions and adapt to changing societal needs.

ESG isn’t just about compliance. By embracing sustainable practices and investing in sustainable business models you strategically benefit your business, its stakeholders and wider society.

How to measure ESG?

Transparent reporting of ESG embedded into strategy and operations builds trust across all stakeholder groups.

• Identify priority areas – consider customer, investor, employee and regulatory interests.
• Survey key stakeholders – understand their concerns related to ESG.
• Collect data – review policies and processes, benchmark against existing KPIs and similar businesses.
• Review the data – identify areas for improvement within existing practices.
• Set a benchmark, goals and objectives for improving performance in each area

ESG performance matters to investors, customers, and employees. It’s a strategic move that benefits your business and the wider society within which the business operates.

Resources

You can learn more about how to create long-term value in your organisation through sustainability and ESG on our Company Purpose and ESG course. Find out more and book here.

Business has a crucial role to play in driving sustainability. Our Sustainable Business Hub provides best practice advice and a wealth of resources. We draw on the knowledge of our Information and Advisory Service and sustainability experts in many different sectors. Our goal is to support you and your organisation to become more sustainable. Read more here.

Don’t forget full IoD membership gives you free access to independent and confidential business advice from a panel of expert advisors who cover a vast range of business topics. Find out more here.