As the agenda of corporate sustainability evolves to include investors, organizations increasingly need to classify business activities for reporting purposes. Differentiating between investor-focused classifications and larger societal considerations is an important exercise for the realization of the broader goals of directing efforts and capital towards climate change and social justice.
What does ESG mean in sustainability?
The acronym ESG stands for Environmental, Social, and Governance. These refer to the various thematic areas under which specific activities of an organization can be classified. ESG differs from the broader term “sustainability” in terms of precision. The term Sustainability can be used to refer to a wide range of actions and ideas that a company is working toward by adopting ethical and responsible business practices. The ESG framework provides a way to operationalize these practices in a measurable way.
Is sustainability part of ESG?
Corporate sustainability aims to integrate the idea formulated by the Bruntland Commission into the way companies operate. Organisations with a sustainability-focused agenda operate in line with a sustainable business strategy or a strategy that takes into account the needs of the environmental, social and financial systems in which a company operates. According to the Green Business Bureau, organizations that implement such a strategy build these practices into systems that can continue indefinitely and create value for stakeholders.
The concept of ESG can serve as a measurement tool for the extent to which a company creates value for its stakeholders through its sustainability strategies. By measuring and collecting data on the specific activities undertaken towards ‘sustainability’, organisations can be held accountable for their performance.
Is ESG the same as sustainable investing?
Sustainable investing differs from traditional investing in that it aligns investor returns with environmental, social and governance insights to improve long-term outcomes, according to the CFA Institute. As noted in a report with Credit Suisse, sustainable investing has a long history and has evolved significantly in recent decades. It began with the exclusion of specific sectors that did not align with investor values – such as tobacco, weapons, etc. The ESG movement evolved alongside the growth of corporate sustainability and the introduction of the UN Principles for Responsible Investment (UN PRI) in 2006. This framework incorporates environmental issues, human capital, human rights, supply chain management, corporate governance and other topics into investment processes to achieve better risk-adjusted returns.
According to a recent report by KPMG, there are a growing number of investors, asset managers and rating agencies that are incorporating sustainability or Environmental, Social and Governance (ESG) information into their assessment of corporate performance and risk. ESG issues are increasingly interlinked and draw attention to the multi-layered risks of social, technological, political, environmental and economic aspects of the business. By using them, companies can better identify risk-adjusted returns and highlight relevance to capital opportunities.
Sustainable investing is now gradually evolving from a risk management practice to a driver of innovation and new opportunities that create long-term value for business and society. The Sustainable Development Goals set in 2015 can provide guidance for this additional level of analysis.
What is the difference between ESG and SDG?
The 17 Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by the United Nations in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.
When these are incorporated into investment decisions and business, the focus is on the goods and services produced themselves and their positive impact on society and the environment. This goes beyond the key risk/return material factors that ESG integration addresses.
Companies whose strategies are aligned with the SDGs not only address environmental and social issues, but also seek to develop viable business models around these solutions. Some of these high-impact issues are education technology, access to finance in developing countries, sustainable food and agriculture, and the new generation of low-carbon technologies.
As mentioned earlier, sustainability encompasses a wide range of issues beyond those that can be solved through market-based solutions. Governments, NGOs, and empowered citizens are all actors that have a crucial role to play in working towards the SDGs and integrating them into the economic system. The role of business in achieving the Global Goals can therefore be strengthened through the co-existence and synchronisation of ESG considerations with the SDGs.
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