The terms ESG (Environmental, Social, and Governance) and Sustainability are often used interchangeably, but they cover distinct concepts within the broader framework of responsible business practices.
The goal of both is to create financially viable businesses that operate within the limits of what the planet can support indefinitely. This means avoiding resource depletion and harm to ecosystems, as well as effectively managing a business’s impact—both positive and negative—on employees, consumers, and the wider community.
Both ESG and Sustainability advocate for ethical decision-making and long-term value creation, ensuring a safe and liveable future for generations to come.
To communicate commitments, progress, challenges and risks, companies publish ESG and/or Sustainability reports. These reports are either voluntary or mandatory, depending on factors such as country/s of operation, industry, and regulatory frameworks.
Despite their shared goal, the nuances between ‘ESG’ and ‘Sustainability’ exert different influences on corporate strategy and reporting.
This underscores the need to understand the distinct contributions that each concept brings to the realm of business.
What is Sustainability?
In any context, Sustainability refers to the capacity to consistently maintain a process over time.
In business, it’s about achieving long-term viability by balancing economic success with environmental stewardship and social responsibility. In this instance, it’s a broad principle that covers a range of responsible and ethical practices. Consequently, it can mean different things to different companies.
For example, one company might focus on reducing its carbon footprint by using energy-efficient technologies. Another might prioritise investing in fair labour practices.
Where a company directs its attention is shaped by its mission and strategy, as well as the need to balance economic, environmental, and social factors (or triple bottom line). Compliance with relevant regulations is also a primary consideration.
What is ESG?
Simply put, ESG (Environmental, Social and Governance) is a subset of Sustainability.
It’s a set of criteria (across ESG metrics) that’s used to assess and measure a company’s Sustainability performance. The goal is to integrate non-financial factors into decision-making by identifying ESG risks and opportunities.
ESG metrics cover a broad spectrum, representing various aspects of a company’s environmental, social and governance practices. Examples include:
Figure 1: Examples of ESG Metrics
While ESG factors are primarily used by investors and financial analysts for investment decision-making, they have broader applications too. Companies are increasingly integrating them into areas like governance, operations, and supply chain management. For example, vetting and selecting suppliers with ethical and sustainable practices aligns ESG with supply chain decisions.
Figure 2: Summary Box – The Difference Between ESG and Sustainability
|Pausing for Reflection: The Difference Between Sustainability and ESG
Sustainability is a broader, long-term approach that is often associated with minimising harm. Its scope can extend to promoting positive effects across environmental, social and economic dimensions.
ESG (Environmental, Social and Governance) is a set of indicators that measure or report business performance.
Pausing for Reflection: Effects on Business Operations
A significant distinction lies in ambition for systemic change:
Sustainability in business demands rethinking around operations. It can result in a new company purpose, new products and services, or changes to strategic direction.
Sustainability can drive transformative change.
Valuable in its own right, ESG provides a structured framework for evaluating specific performance criteria. It measures progress on Sustainability and can support incremental change by enhancing Sustainability and operational efficiency within frameworks.
Implications for Reporting
ESG vs. Sustainability Reporting
ESG reporting focuses on the ESG factors affecting financial performance, while Sustainability reporting communicates a company’s overall environmental, social, and economic performance.
Although they differ in scope, both foster transparency and accountability. Some companies strategically engage in dual reporting for a comprehensive view of their commitment to responsible business practices.
The choice of report type is influenced by various factors, including regulatory requirements, political landscapes, and financial considerations. Evaluating issues most material to an organisation is crucial, ensuring alignment with strategic objectives and meeting stakeholder expectations.
Materiality in Reporting
The concept of ‘materiality’ is the filter used to spotlight the most pressing Sustainability issues.
Materiality recognises that Sustainability matters vary in significance. By identifying ‘material topics’, companies are able to focus on the economic, environmental, and social issues most affected by their operations, that most affect the company itself, and that have significant influence on stakeholder decisions.
Materiality helps create reports that are useful and relevant. It comes in different forms, each with distinct advantages and limitations:
- Single materiality: This approach focuses on how sustainability issues financially affect a company. It helps companies zero in on matters that are most important to their financial performance.
- However, single materiality, with its narrow focus on business impacts, risks oversimplification and can overlook value creation opportunities across wider social and environmental contexts.
- Double materiality: Double materiality offers a more comprehensive view of a company’s operations, examining both the enterprise’s impact on social and environmental issues and the influence of these issues on the company’s financial outcomes.
- Implementing double materiality can be complex and resource intensive. It requires a thorough understanding and analysis of a wide range of factors, both internal and external to the company. This complexity can pose challenges, especially for smaller organisations with limited resources.
- Triple materiality: Triple materiality goes even further by examining a company’s impact on society and the environment, the influence of these factors on its financial performance, and the context within which these assessments take place.
- Triple materiality can facilitate a more genuine analysis of an organisation’s sustainability by grounding reporting in context-based metrics. Like double materiality, it can be complex and resource intensive.
Reporting Standards and Frameworks
The landscape of Sustainability and ESG standards is constantly evolving, reflecting the dynamic nature of global priorities and the ongoing movement to advance responsible business practices.
Key standards and frameworks include:
The GRI (Global Reporting Initiative): A widely used Sustainability reporting framework, the GRI helps organisations detail their ESG impacts. Aligned with the concept of double materiality, GRI helps companies report on impacts in a standardised and comparable way.
Sustainability Accounting Standards Board (SASB) Standards: Centred on financial materiality (single materiality), SASB Standards highlight key ESG factors impacting financial performance. The aim is to help companies disclose essential Sustainability data to investors, ensuring ESG factors are integrated into financial reporting.
The Task Force on Climate-related Financial Disclosures (TCFD): Specialising in climate-related financial disclosure, the TCFD is an ESG framework that enables organisations to effectively communicate climate-related risks and opportunities. Its aim is to boost climate transparency and aid informed financial decision-making.
The Corporate Sustainability Reporting Directive: The CSRD has emerged as a significant regulatory development in Sustainability reporting. Based on the concept of double materiality, the CSRD requires EU companies, including qualifying EU subsidiaries of non-EU firms, to disclose both their environmental and societal impacts and how these intersect with their business operations.
The Sustainable Development Performance Indicators (SDPI): The recent (2022) SDPI developed by the United Nations Research Institute for Social Development (UNRISD), offer a new way to measure and report how organisations contribute to sustainable development.
The SDPI were created to address prevalent problems in existing reporting, such as selective data usage, omissions, and the presentation of data without sufficient context.
The indicators serve as an alternative to ESG reporting, which the UNRISD refers to as ‘neo-ESG.’ Not only do they transcend ESG reporting (single materiality) by assessing the impacts and risks that an organisation exerts on the external world, but the approach goes even further to advocate for context-based reporting (triple materiality).
In other words, the approach emphasises the importance of understanding and reporting an organisation’s activities in relation to the broader context of Sustainability challenges and goals.
Table 1: ESG Reporting vs Sustainability Reporting
|Environmental, Social and Governance (affecting financial performance).
|Encompasses a broader spectrum, including not only ESG factors but also other areas contributing to long-term sustainable business practices.
|Primarily aimed at investors and financial institutions, but stakeholders also include customers, employees and regulators
|Reports are typically intended for a wider audience, including but not limited to, investors, employees, customers, communities, suppliers, and the environment.
|Prioritises issues that are financially material to the business.
|Considers a wider range of material issues, including those with social and environmental impacts.
|Often guided by frameworks like SASB and TCFD, with increasing regulatory attention in some regions.
|Guided by frameworks like GRI, with some mandatory reporting aspects in certain jurisdictions.
|Integration with Financial Reporting:
|Increasing emphasis on integrating ESG metrics into financial reporting for a comprehensive view of a company’s performance.
|May integrate sustainability metrics into financial reporting or present them separately, depending on the organisation’s reporting approach and regulatory requirements.
|Targets specific ESG metrics that are most relevant to the industry and business operations, focusing on areas with significant financial impact and risk.
|Covers a wide array of sustainability topics, including ESG metrics and additional data that reflect the company’s broader sustainability practices and impacts on society and the environment.
|To inform stakeholders about how ESG factors influence financial performance and risks.
|To provide a comprehensive view of the company’s sustainability practices and impacts on society and the environment.
Why are Standards and Frameworks Necessary?
Standards and frameworks are crucial because they provide structure and context to how companies report on their ESG efforts, ensuring consistent and meaningful disclosure.
However, the challenge lies in navigating the absence of globally recognised guidelines and the potential for greenwashing.
In this dynamic landscape, it’s critical for companies to carefully select standards and frameworks that meet their unique needs, facilitate sustainable development, and clearly convey important information to stakeholders.
For expert support to navigate long-term value creation aligned with your reporting, we invite you to