Let’s be clear: ESG is not ‘woke’ and it’s different from sustainability

Almost every company has by now adopted at least some core ESG principles, which means that they consider, measure, and report the environmental, social, and governance aspects of their business alongside financial considerations.  

In fact, ESG has become so omnipresent that many companies use the term to cover all their sustainability-related activities. Yet while it has become common practice to use the terms interchangeably, there are good reasons to distinguish between them. 

Have you ever wondered why ESG has conquered the business world so quickly? A key reason can be seen in the emergence of investors in the sustainability community. Investors are increasingly considering a company’s ESG characteristics alongside its financial attributes when making investment decisions. 

So, ESG is primarily a risk management and investment framework that seeks to evaluate the financial risks that environmental, social, and governance factors pose for a company’s value. It adopts an “outside-in” perspective that is best described as an investor- and company-centric framework which seeks to de-risk portfolios and increase the economic resilience of a company.  

As you can see, this approach is far from “woke capitalism”, as condemned by some US politicians. This is not about ideology. This is simply about solid risk management and is simply good business. The ratings and indices used by investors to identify ESG stocks are not designed to measure a company’s positive impact on the Earth and society. Instead, they assess the potential impact the world has on a company’s value and its shareholders. Doesn’t this sound very much as if Milton Friedman would approve?  

Conversely, corporate sustainability adopts an “inside-out” perspective as it focuses on the impact a company has on the planet and society. The people- and planet-centric approach seeks to not only minimize harm, but to positively impact society and the environment. As such, it can be costly at times, for example when paying a fair price to everyone in the supply chain or paying a price premium for more environmentally friendly materials. This explains why business leaders have historically shied away from pursuing ambitious sustainability strategies, as true sustainable business transformations come at a price – at least in the short term.  

True sustainability also involves broadening the definition of value creation when investing in a sustainable portfolio. This means that investors are willing to forego some of their return on investment in favor of the positive social and environmental impact created. Contrary to ESG investments, sustainable thematic investments and impact investments refer to investments made with the intention of solving a social or environmental problem and creating a measurable positive impact alongside financial returns. This means not just looking for investments that do less harm, but investing in companies that are making a positive difference in the world and thereby contributing to a sustainable, inclusive, and just transition.  

Implications for business leaders and investors 

Are you thinking about sustainability in terms of a risk, an opportunity, or a responsibility for your company?  

While ESG considerations are dominating much of the sustainability conversation in the business world, the concept of ESG tends to reduce the conversation to financial risks and how to minimize them. All too often, companies and business leaders are not getting any insights from ESG analyses because they approach the issue solely as a reporting exercise. While this “tick-box” approach requires an incredible amount of data, it does not offer any insights on how to seize the enormous opportunities of sustainable transformation.