ESG is an acronym standing for the environment, social, and governance, where the ‘environment’ element focuses on reducing carbon dioxide and other greenhouse gas emissions and more generally protecting the environment.
‘Social’ criteria look into how businesses and organisations manage the relationship between and among various stakeholders, including employees, investors and local communities.
And ‘governance’ covers the idea of fair and transparent management as well as encouraging the fullest disclosure of information to relevant stakeholders.
At first glance it is tempting to see this as nothing more than a rebrand of sustainability, but there are several important differences that make it both broader in scope and, significantly, mean it leaves businesses and organisations more accountable.
Just think for a moment about the use of the term ‘green’ that is appended to policies, projects, products and programmes. It has been scattered around so liberally in an effort to suggest something that has been designed with the good of the environment in mind it has almost ceased to be meaningful.
Businesses at all levels, including public and private catering operators, have rushed out corporate social responsibility brochures full of photos of fields and trees without backing up this self-promotion with any serious, thought-out strategy for measurable change and improvement.
Not for nothing do we often here such cynical efforts dismissed as ‘greenwashing’.
Unfortunately, ‘sustainable’ and ‘sustainability’ have also been either overused or misused to the point of becoming almost meaningless.
It may well be the case that the motivation behind a ‘sustainability strategy’ is well-intentioned, the trouble is that it can mean different things to different people.
The Oxford English dictionary says that in an environmental context, sustainability means ‘using resources in a manner that ensures an ecological balance’. As far as business practice is concerned it means adhering to the principle ‘doing well by doing good’. Which sounds commendable but very vague.
Riding to the rescue now we have ESG, which promises not only a bit of a ‘fresh start’ in terms of name but also a more rigorous and measurable way of operating in the world that takes full account of the environment, the workforce and the local communities that are affected.
The incorporation of ESG into business practice is much more than a rebadging exercise, it differs from popular sustainability goals in its scope, in the benchmarking of goals and standards, and in the disclosure of data that it demands.
Take, for example, a comparison of the scope of each, and it becomes clear the distinction between the two is well marked and very relevant when it comes to investment.
Sustainable investment is based on the selection of projects or programmes that have a positive impact on social and environmental aspects, where an entity is ready to sacrifice profits for a clean environment.
On the other hand, ESG bases investment decisions on a broader level where, in addition to the promotion of socially and environmentally conscious practices, it screens out investments based on given criteria such as treatment of workers, animal testing and child labour among other things.
In general terms, ESG seeks to identify and rank actions that show desirable outcomes. Such characteristics are broader than those considered under sustainability policies, extending to directors’ pay, diversity of stakeholders, the treatment of workers, community engagement, and health and safety issues among others.
Environmental criteria may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help evaluate any environmental risks a company might face and how the company is managing those risks.
Other considerations include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations.
When it comes to social criteria, ESG asks whether a company holds its suppliers to its own standards? Does it donate a percentage of its profits to the local community or encourage employees to perform volunteer work there?
Do workplace conditions reflect a high regard for employee health and safety? Is it taking unethical advantage of its customers?
ESG governance standards ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders.
ESG investors may require assurances that companies avoid conflicts of interest in their choice of board members and senior executives, don’t use political contributions to obtain preferential treatment, or engage in illegal conduct.
The switch from sustainability to ESG metrics suggests that business practices are evolving to more accurate and comparable performance measurements.
Business and organisational leaders understand the need to become more sophisticated in the way they approach this important issue and that there is a need to improve on the collection and tracking metrics they use.
In fact, to make their operations truly more sustainable businesses and organisations need to expand the scope of what they measure and initiatives are better captured by examining them through the ESG lens rather than simply capturing under the broad cover of sustainability.
The move from ‘green’ or ‘sustainable’ to ESG might seem like a matter of semantics, but as businesses try to adapt to meet the demands of wider society it is crucial they concentrate on what matters.
While sustainability is a general term for simply aiming to do better, ESG makes explicit what needs to be done and, importantly, how it is measured.