Sustainability vs ESG: What's the Difference, and Why Does It Matter?
Many people use the terms sustainability and ESG interchangeably, including business leaders and environmental experts.
It makes sense, in a way, as both share the same goal of improving a company’s business practices in order to boost profits and win favor from investors, customers, and regulators.
That said, there are some key differences you’ll want to be aware of between these two initiatives — especially if you’re responsible for implementing them for your organization.
So, how are these two concepts alike and different? Where do they overlap? And, does it matter? Let’s take a closer look.
The difference between sustainability and ESG
Although sustainability and ESG are similar, there's one main difference: sustainability is vague, and ESG is specific and measurable. While sustainability can mean different things to different companies, ESG provides a specific set of criteria — namely, environmental, social, and governance — that companies can measure and report against.
In recent years, sustainability has become synonymous with “going green” or “reducing your carbon footprint”. So when most people think about sustainability, they think about things like reducing energy consumption and tracking water usage.
Nothing wrong with those things, of course. They're important goals for any organization that wants to reduce costs, improve performance, and make a positive contribution.
However, that’s a pretty narrow definition of sustainability. Sustainability is an umbrella term that encompasses all of a company’s efforts to reduce its impact on the world around it. For example, sustainability can also mean creating good jobs or promoting gender equality — in addition to helping the environment.
However, companies might struggle to get their arms around such a broad concept.
For that reason, sustainability has never been truly integrated into most organizations. Most have a vague idea of what they need to do, but struggle to measure and report on performance.
ESG, on the other hand, is much more specific and data-driven. It is focused on three dimensions (environmental, social, and governance) rather than just going green or being a responsible steward. Let’s take a closer look at each of these dimensions.
The environmental dimension is most closely related to what most of us think of when we think of sustainability. It is focused on improving the environmental performance of a company.
That can include things like reducing carbon emissions, improving resource efficiency, reducing waste, and complying with environmental regulations. It can also include things like climate risk management.
But ESG also involves other efforts that help with a company’s overall performance and profitability; namely social and governance, which are not (always) included in sustainability.
The social dimension is focused on a business’ impact on its employees, customers, and the community.
This can include things inside like workplace safety, employee engagement, diversity and inclusion, customer satisfaction, and even data and privacy.
As you can see, the social dimension of ESG covers many more aspects than sustainability efforts normally would.
The governance dimension is focused on a business’ leadership and structure.
Issues like how much executives get paid, who is on the board, whether shareholders get to vote on important issues, and even how a company conducts audits and prevents bribery and corruption, all fall under the governance dimension.
ESG also puts a heavy emphasis on risk management. Monitoring and mitigating risks across all three dimensions is an important priority for any company that is serious about ESG.
Why ESG is here to stay: data-backed benefits
So is ESG just another buzzword? We think not.
But don't take our word for it — let's look at the data:
- ESG can reduce costs significantly — McKinsey Research found that an effective ESG strategy can affect operating profits by as much as 60%
- 71% of CEOs believe it is their personal responsibility to ensure that the organization’s ESG policies reflect the values of their customers, according to KPMG
- Many major banks and investing firms including Blackrock have incorporated ESG investing criteria into their processes and products
- Deloitte found that ESG-mandated assets could make up half of all professionally managed investments by 2025, totaling $35 trillion.
"ESG-oriented investing has experienced a meteoric rise… The acceleration has been driven by heightened social, governmental, and consumer attention on the broader impact of corporations, as well as by the investors and executives who realize that a strong ESG proposition can safeguard a company’s long-term success. The magnitude of investment flow suggests that ESG is much more than a fad or a feel-good exercise."
In short, ESG is here to stay. Not because we say so, but because there’s ample evidence demonstrating the benefits.
So what does this all mean, and does it matter? Absolutely.
There are real implications for organizational structure, roles and responsibilities, as well as — you guessed it — budget allocations.
While global business leaders no doubt recognize the importance of sustainability, most smaller organizations still view it as a “nice-to-have” rather than a necessity.
The fact that ESG delivers proven value gives you an opportunity to talk to senior leaders about environmental, safety, and compliance issues in a strategic way. You’re presenting the evidence-backed benefits, not fuzzy feel-good green initiatives.
By ensuring that environmental and safety programs are an integral part of the businesses’ strategy and attached to its overall goals, EHS departments can demonstrate the value and necessity of focusing on the environment, people, and compliance to ensure the overall success of the organization.
Not only that, but it allows safety and environmental experts to position themselves as someone who can influence performance and profits in a big way — thus ensuring themselves a seat at the table.