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Brain Circuits
Spot the difference: ESG and sustainability
The terms āESGā (environmental, social, and governance) and āsustainabilityā are often used interchangeably, but they are not the same. Understanding the distinction is crucial for business leaders who want to make informed decisions about their company’s future. Test your knowledge of each below and read on to see how they fundamentally differ.
Which could be described as an āoutside-inā approach?
- a. Sustainability
- b. ESG
Answer: (b). ESG is fundamentally an āoutside-inā approach, where the goal is to assess how external environmental, social, and governance issues could affect a company’s financial performance.
Which is more concerned with the effect that a company has on the environment and society?
- a. Sustainability
- b. ESG
Answer: (a). Sustainability focuses on the effect that a companyās operations have on the environment and society; hence, it could be said to take an āinside-outā approach.
Which approach provides a framework for evaluating a companyās risk profile?
- a. Sustainability
- b. ESG
Answer: (b). ESG identifies and manages the financial risks associated with environmental, social, and governance factors.
āESG is about protecting the company's value by minimizing these risks, it is aligned with traditional financial management practices.ā
Understanding the difference
ESG
ESG concerns investment criteria: investors evaluate a company’s risk profile and financial performance based on environmental, social, and governance factors; hence, it serves as a framework to identify and manage the financial risks associated with these factors.
And because ESG is about protecting the company’s value by minimizing these risks, it is aligned with traditional financial management practices ā risk mitigation and ensuring that the company remains a sound investment.
Issues include:
- Carbon emissions, water use, waste management, and biodiversity (environmental).
- Labor practices, human rights, community engagement, and customer privacy (social).
- Corporate governance structures, board diversity, executive compensation, and transparency (governance).
Instead of focusing on financial returns, sustainable businesses consider the social and environmental value they create.
Sustainability
Sustainability, by contrast, focuses on the effect that a company has on the environment and society ā itās about how company operations affect the world. This people- and planet-centric approach goes beyond risk management to consider the broad implications of business decisions. True sustainability aims not only to minimize harm but to create positive impact ā whether through reducing environmental footprints, enhancing social equity, or driving economic inclusivity.
Sustainability is also about redefining value creation. Instead of focusing on financial returns, sustainable businesses consider the social and environmental value they create.
Issues include:
- Paying fair wages throughout the supply chain.
- Investing in renewable energy (even if it’s more expensive in the short term).
- Developing products that promote health and well-being.
Key learnings
Business leaders must recognize that while ESG considerations are essential, they should not be the end goal: focusing on ESG can lead to a ātick-boxā mentality, emphasizing compliance rather than transforming the business for long-term sustainability.
True sustainability requires going beyond risk management by actively seeking opportunities for positive impact. This might mean decisions that are costly in the short term but that target value-creation and contribute to a more sustainable and inclusive future.
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