- Category:Thought Leadership
- Offering:Thought Leadership
Two of our most popular terms are often used interchangeably. Churchill consultant Katelyn Prendiville explains how and why they are different.
The terms sustainability and ESG are often used interchangeably, despite meaning different things for organisations. Given the rapidly accelerating business imperative and societal urgency to address sustainability issues, it’s important to understand this difference, and how it can be applied to different contexts.
Let’s start with sustainability, given that ESG falls underneath this. Sustainability has historically been associated with environmental or ‘green’ initiatives. However, true sustainability (at least from a human society perspective) requires that we consider social equity and economic development, as well as the natural environment.
The most broadly used definition of sustainability is the one developed by the 1987 Brundtland Commission: meeting the needs of the present without compromising the ability of future generations to meet their own needs. This definition encapsulates that idea of both people AND planet, with the inter-generational aspect forming a core tenet of sustainable development frameworks.
To achieve sustainability, an integrated approach and collaboration from all levels of society, including businesses, is required. Given their dependence on a flourishing society and an environment capable of supporting its needs, it’s in the interests of organisations to contribute to a sustainable future (see diagram 1). Sustainability can also be understood by businesses as a way to create long-term value for stakeholders, through management of its environmental and social impacts.
ESG, on the other hand, measures the Environmental, Social, and Governance performance of organisations. They are the material ‘non-financial’ factors that drive investment risk within an organisation and its external environment. ESG ratings, increasingly used by investors as part of their decision-making process, measure business environmental and social impacts – and the effectiveness of corporate governance in managing them.
So, where do they converge?
Over the years, both sustainability and ESG have become a boardroom agenda, deeply intertwined with the overall business strategy. Both focus on reducing negative impacts and increasing positive impacts from business activities, and communicating those outcomes to stakeholders.
However, where sustainability is a broader umbrella term, ESG is a more specific term for investors and the capital markets and includes criteria that can help them quantify, evaluate, and benchmark performance. For businesses, deciding which term to use depends on what their objectives are and how many resources they can allocate to the sustainability function. Reporting on ESG typically requires more rigorous processes and data sets, whereas sustainability reports can be more streamlined and specific (although this can also depend on which reporting framework is used).
In conclusion, sustainability may mean different things to different entities, including communities, non-profit organisations, schools, and businesses – while ESG is a set group of criteria that every company can be measured (and compared) against.