ESG is not Sustainability

The world of ESG has taken off and is catching on in Asia. Everyone is talking about how important adopting ESG initiatives is and how investors are taking notice of risk mitigation through ESG performance. The term has become one of those acronyms that many people recognize, yet not everyone understands. Without getting too pedantic, definitions are important to ensure alignment, prevent misallocation of valuable resources and guard against accidental greenwashing.

In my years as a university lecturer, I have observed this sense of confusion amongst my students as well as from the wider community, regarding the concept of ESG. Often it is mistakenly used interchangeably with sustainability or even perceived as solely focusing on climate change.

ESG stands for Environment, Social and Governance. Governance has been around for a while, most companies report on their share structure, ownership and most investors actually do want to know if managers are being paid too much and if the Board is qualified. Although G doesn’t necessarily have a dollar figure attached to it, it is important, and investors know that. Around the time of the 2005 UNEP report, when the term was first coined, environment was also considered very important. The S or social issues only taking on more relevance latterly, especially with the 2008 financial crisis and the renewed debate about ESG and fiduciary duty. There is plenty of evidence that the ESG factors impact the financial well-being of a business and that without due consideration of the E and S businesses not only increase their risk, they also miss opportunities.

That’s what it stands for but what actually is it? It is an assessment approach popularly used by investors, where the aim is to have a “score” for overall performance from which investors can gauge the business like a “credit’’ score i.e., how investable, or low risk is the business based on its performance of responsible behaviour.

Although primarily developed to be an evaluation tool for investors to assess the level at which the business is managing risk and disclosing performance improvements on specific “material” topics, it has become a valuable tool when partnered with reporting and other assessment tools. It has increased the pressure on businesses, but also on authorities and intermediaries, to raise the bar, such as listing requirements. As ESG has grown and been adopted, it has:

helped investors reduce risk
supported businesses to drive performance improvements
increased the quantity of reporting and to some extent improved reporting quality
improved the information available to investors and the public

As the ESG ‘’industry’’ has expanded, the term has become erroneously intertwined with sustainability. However, it is essential to emphasise that sustainability is not a subset of ESG but rather the encompassing concept to which all ESG efforts contribute. Sustainability embodies the principles and values of living in harmony with the planet while achieving peace and equality through our activities and institutions. In contrast, ESG efforts, simply put, are how organisations measure, monitor and manage their performance to be more sustainable.

If an organisation is merely focussing on philanthropical and volunteering programmes, that is CSR or Corporate Social Responsibility efforts (and not ESG or Sustainability). Yes, CSR was effective in driving the responsibility agenda but it became too broad, and philosophical for businesses. Whereas ESG has gained traction as it gave quantitative measures to which business leaders and investors could relate more directly to their business, and therefore could more readily adopt the related frameworks.

Understanding where it came from, its purpose and objectives, gives us insights as to how the term ESG has been used, misused and perhaps abused. It’s not in anyone’s interest, let alone a company’s self-interest, to reduce ESG to mere marketing or differentiation strategies or view it solely as a risk management exercise. Whilst important to look back and establish clarity on definitions, I now find myself looking to the future. As we move forward, I begin to wonder where in ESG does humanity and well-being fit? How might we evolve this tool from doing less bad i.e., mitigation, to positive or regenerative investments i.e., the real impact of ESG capital?

Main contributor: Dr Margaret Burnett, The Purpose Business