Focus on the result, not the words
‘ESG’ and ‘sustainability’… are you clear on their definitions, how they differ and most importantly how to use them to drive action, which after all is what matters most?
Simply put, these terms bring structure and provide a framework to help organisations balance short-term profit-seeking with longer-term responsible practice and commercial resilience and success.
The Definition of Sustainability
The word sustainability has been in use since 1830. It was used long before awareness of climate change and the definition provided by the Oxford English Dictionary in 1924 still stands true today:
Definition: “Capable of being maintained or continued at a certain rate or level.”
There are of course other related terms which have come into use over the last decade or so and the definitions and differences between them are not always clear/obvious.
This can lead to conflicting agendas, a lack of understanding, and a generally unhelpful distraction from the intended purpose*
* helping organisations have a positive effect on the environment and society while creating long-term resilience and value.
Sustainability V. ESG
While these terms are related, they are not the same, so to remove the risk of confusion, here’s a brief definition of each one.
Sustainability is the concept of meeting present needs without compromising future generations. Sustainable businesses consider the long-term viability of people, the planet, and profit, or, in other words, they use responsible business practices that maintain or improve the environment, society, and their economic value over the long term.
Meanwhile, ‘ESG’, or Environmental, Social, and Governance, refers to a set of criteria (generally non-financial) used to evaluate a company's or investors' responsible business practices and their performance in managing the environmental, social and governance factors that are material to their business.
So, sustainability is the overarching concept, while ESG (Environmental, Social, and Governance) is a specific framework that organisations use to measure, report, and improve their sustainability performance across key areas.
ESG in its current form isn’t working
Now for a reality check.
Despite decades of corporate commitments, technological innovation, and substantial investments in clean technologies, the sustainability crisis is getting worse. We are reminded of this almost daily with news, images and first-hand experience of catastrophic weather events the world over.
What we are doing to combat the damage to our climate and society simply isn’t enough.
Yes, there has been impressive progress in implementing solutions, but the efforts are not keeping pace with the scale of environmental and climate challenges/demise.
There is not enough recognition in the market of the financial risks climate-related and broader sustainability impacts pose to the whole economy.
“What we have seen this summer is you go from global warming to global boiling”, adding: “climate change is an increasing financial risk partly because rising temperatures were affecting crop productivity, causing price inflation in foodstuffs from orange juice to rice. Lately there is a much closer link between climate and inflation. That’s why it’s a proper financial risk . . . ”
So what now?
We do however see certain aspects of ESG that are moving markets in the right direction.
Regulation on ESG disclosure, when properly used as a risk management and opportunity identification tool, has the potential to and is driving real change.
Whilst the frameworks are not perfect and first-time compliance requires a huge amount of work, they are forcing businesses to consider how sustainability factors impact business models and performance.
As a result, we see a fundamental change in corporate leadership mindsets, as the real business risk is calculated and reported in black and white in their Financial statements and Shareholder reports.
For example, to comply with TCFD (Task Force on Climate-Related Financial Disclosures), companies in the UK must assess and disclose the risks associated with three future possible climate scenarios, particularly the financial risks and opportunities these bring. The results are published alongside the financial statements in the company’s Annual Report.
However, it is time to acknowledge that market forces need to work within a context of deeper structural changes to protect the foundations upon which society, the environment and businesses rely. There is no golden bullet-type solution to the challenges we face; everyone in the market ecosystem has to play their part.
The University of Cambridge Institute for Sustainability Leadership recently published a discussion paper titled Survival of the Fittest: From ESG to Competitive Sustainability which highlighted the above state of affairs.
It recommends:
‘We need to design out the prevailing tension between profitability and sustainability. This can only be addressed by consistent, long-term government commitments and effective delivery plans that drive all businesses to act, creating thriving markets for climate-neutral, nature-positive and circular products, and punishing those who fail to act. Such ambition, with the policy and regulations needed, will only materialise if a critical mass of business leaders actively demand it.’
A call to action
It's time to stop debating terminology and take decisive action on the massive transition we all face.
So what can you as a business do?
Advocate for Policy Change engaging with policymakers to make consistent, long-term commitments that align business practices with sustainability goals.
Integrate Sustainability into Business Strategy: Assess and refine your organisational strategies to prioritise sustainability as a core component. Ensure that environmental, social, and governance considerations are embedded in decision-making processes.
Focus on Measurable Outcomes: Establish clear metrics to evaluate the impact of sustainability initiatives. Regularly report on progress and outcomes to stakeholders, demonstrating accountability and commitment.
Collaborate within and Across Sectors: Partner with other businesses, NGOs, and governmental entities to share best practices and develop innovative solutions that drive sustainable growth. Use these collectives as a force for good in your advocacy efforts.
Invest in Sustainable Innovation: Allocate resources towards research and development of sustainable products and services. Embrace new technologies and practices that enhance efficiency and reduce environmental impact.
Take these steps and your organisation will not only mitigate risks associated with climate and societal change but also position yourselves as leaders in the evolving market landscape.