Global ESG’s assets under management (AUM) will rise from $30 trillion in 2022 to over $40 trillion by 2030. Additionally, the World Economic Forum foresees the possibility of unlocking investment opportunities of up to 10.1 trillion by 2030 by adopting nature-positive transitions along key socioeconomic lines. Such arguments and increased global attention towards climate change have led to the terms ESG vs sustainability often being used interchangeably in the corporate world.
Essentially, ESG is a specific benchmark for measuring a company’s performance in three areas: environmental, social, and governance. On the other hand, sustainability is about running a business in a manner that doesn’t negatively affect the environment or the people that interact with it.
Note that while ESG specifically focuses on a company’s environmental, social, and governance aspects, sustainability is more broad-ranging. It evaluates a business on a wide range of topics, including ESG. It’s also worth noting that whereas ESG focuses on the impact of the planet on a company, sustainability focuses on the opposite – the impact of the business on the planet.
Of course, there are many other differences between the two frameworks that we shall explore in this article. Equally, there are similarities between ESG and sustainability worth noting, which are primarily why most people confuse the two terms and use them interchangeably.
Overall, if you are hoping to expand your business globally, it’s essential to understand the concepts of ESG sustainability. After all, investors and other stakeholders use both metrics when assessing business performance and making key decisions. Let’s get you started!
ESG Vs Sustainability Overview
| – | ESG | Sustainability |
| Founding Pillars | Environmental stewardship, social responsibility, and corporate governance | Environmental sustainability, social sustainability, and economic sustainability |
| Evaluation Metric | A specific benchmark that evaluates a company’s performance in environmental, social, and governance areas | A broad-range benchmark that assesses the performance of a company on social, environmental, and economic fronts |
| Impact Lens | How the world impacts the business | How the business affects the planet |
| Key Roles | Compliance, risk assessment, and investor reporting | Driving innovation and long-term value creation |
| Relation Focus | The board and other key stakeholders | The business and environment |
| Nature of Regulatory Framework | Less prescriptive (but more diverse) | More prescriptive |
| Investment Perception | Financially material | Sustainable Investing |
| Key Terms | ESG metrics, ESG factors, ESG scores, ESG audits, ESG risks, and ESG opportunities | Biodiversity, CSR, sustainable investing, sustainable development, and supply chain |
Key Takeaway:
- ESG encompasses a set of criteria for measuring a company’s performance based on environmental, social, and governance parameters.
- Sustainability encompasses efforts to run a business in a way that doesn’t harm the environment or the people around it now or in the future.
- ESG and sustainability deal with the same environmental and social factors and have shared values, corporate responsibility, and regulatory frameworks.
- The key difference between ESG and sustainability is that while ESG focuses on governance alongside environmental and social parameters, sustainability focuses on economic lines and tends to be more broad-based.
- Other than the founding pillars and evaluation metrics, ESG and sustainability can be differentiated according to the impact lens, key roles, relation focus, regulatory framework, investment perception, and key terms.
- Businesses need ESG and sustainability to reduce costs, mitigate risks, attract and retain talent, improve brand image, be competitive, attract investors, and increase revenue.
What’s ESG in Business?
ESG is a criterion for evaluating a company’s performance per environmental, social, and governance metrics. Here’s what the three ESG metrics are all about:
‘E’ for Environmental
The environmental metric focuses on ecological issues such as waste management, water conservation, greenhouse gas effects, and energy efficiency. It’s all about the relationship between the business and these environmental issues. Moreover, it focuses on environmental regulations, climate change resilience, and emission management.
‘S’ for Social
The social metric focuses on social responsibility and involves the business’s impact on the people around it (employees, customers, and community). It measures a company’s commitment to fairness, equality, diversity, and inclusion. The metric also addresses the following:
- Community relations
- Supply chains
- Workplace safety
- Employee development
- Corporate citizenship
- Human capital development
‘G’ for Governance
The governance metric measures how the business is run. Its key principles are accountability, transparency, and ethical leadership. Some of the issues that the metric focuses on include:
- Board diversity
- Shareholders rights
- Executive compensation
- Risk management
- Board’s power and mandate
What’s Sustainability in Business?
Sustainability is all about running a business in a manner that meets the environmental, social, and economic needs of the present society without compromising those of the future. So, unlike ESG, which is founded on the pillars of environmental, social, and governance metrics, sustainability is built on these metrics.
Here’s what to know about the three sustainability metrics:
- Environmental metric: Environmental sustainability focuses on eliminating or mitigating adverse environmental impacts. It includes waste reduction, pollution mitigation, and conservation of natural resources.
- Social metric: Social sustainability focuses on social equity, safe labor practices, inclusion and diversity, community involvement, and human rights.
- Economic metric: Economic sustainability focuses on creating economic value and long-term profitability. Additionally, this metric measures how a business harmonizes financial gain with ethical practices and ensures resources are responsibly allocated.
Similarities Between ESG and Sustainability
ESG and sustainability have much in common, making it difficult to separate the two terms. The similarities include:
1. Similar Metrics
ESG and sustainability focus on environmental and social metrics when measuring company performance. The only difference is that sustainability is more holistic, focusing on the company’s economic aspects.
Regarding the environmental metric, ESG and sustainability focus on protecting Mother Nature through sustainable practices. Meanwhile, the social metric for both cases focuses on the business’s impact on the people, especially the employees and community.
2. Shared Valued
As we’ve already shared, both ESG and sustainability frameworks focus on environmental stewardship and social equity as their founding pillars. But even so, the two frameworks prioritize ethical governance and seek corporate alignment with action goals.
3. Corporate Responsibility
Both ESG and sustainability emphasize the need for companies to demonstrate corporate responsibility, which is the impact of the business on society, the economy, and the environment. This business model requires a company’s actions to be sustainable and ethical concerning environmental, economic, and social parameters. It enables companies to be answerable to stakeholders, ultimately improving reputation and competitiveness.
4. Regulatory Frameworks
Both ESG and sustainability have clear roadmaps for a sustainable future, called regulatory frameworks. Some of the regulatory frameworks they share are shared in the table below:
| Regulatory Framework | Short Form | Description |
| Global Reporting Initiative | GRI | Provides sustainable ESG frameworks and standards for effective sustainability reporting |
| United Nations Sustainable Development Goals | UN SDGS | Lists about 17 goals for creating an equitable and more sustainable future and one that addresses global sustainability challenges |
| Sustainability Accounting Standards Board | SASB | It covers five critical sustainability concerns: environment, human capital, leadership & governance, social capital, and business model & innovation. |
| Principles for Responsible Investing | PRI | Encourages responsible investments and effective risk management |
| International Sustainability Standards Board | ISSB | Provides a global basis for sustainability standards and proposes adequate disclosures on sustainability issues and climate |
| Task Force on Climate-Related Financial Disclosures | TFCD | Offers recommendations for informed decisions on climate-related financial risks |
| Corporate Sustainability Reporting Directive | CSRD | Requires large corporations to disclose their sustainability information and align it with global standards |
ESG Vs Sustainability: Key Differences
As much as ESG and sustainability have a lot in common, they equally have some differences, which are as follows:
1. Founding Pillars
ESG is founded on environmental stewardship, social responsibility, and corporate governance. Environmental stewardship focuses on a business’s impact on the planet and its efforts to protect the environment through sustainable conservation efforts. Social responsibility focuses on how the business impacts the people, who include the staff, community, and customers, while governance is about how the company is governed.
Meanwhile, sustainability is equally founded on three pillars: environmental, social, and economic. The only difference is that the economic pillar, which is more broad-based, takes the place of the governance pillar. The economic pillar focuses on profitability and long-term value creation.
2. Evaluation Metrics
ESG is specific when measuring business performance, focusing on the business’s environmental, social, and governance aspects. It’s a standardized framework that enables stakeholders, particularly investors, to evaluate a business’s environmental and social aspects and governance practices.
Meanwhile, sustainability is more broad-based. It focuses on the business’s environmental, social, and economic aspects. It covers a variety of issues like stakeholder engagement, community development, supply chain management, and ESG.
3. Impact Lens
This is undeniably the easiest way to differentiate ESF from sustainability. ESG focuses on how the world impacts a business, while sustainability focuses on how a business impacts the planet.
4. Key Roles
ESG and sustainability have diverse roles in companies. ESG offers a roadmap for which companies should operate while prioritizing ecological, social, and governance matters. For instance, part of ESG role in corporate entities is:
- Compliance with environmental, social, and governance standards
- Risk assessment – which involves identification and analysis of potential corporate risks
- Investor reporting – which encompasses reporting on investment strategies, asset composition, and financial performance
On the other hand, the key role of sustainability includes driving innovation, which could imply adopting renewable energy solutions and developing more sustainable products. It’s also part of sustainability to create long-term value for the company.
5. Relation Focus
ESG focuses on the relationship between the board and other key stakeholders. In this case, the ‘other key stakeholders’ include shareholders, investors, the CEO, employees, and the community. It focuses on their identity, duties, and responsibilities on environmental, social, and governance matters.
In contrast, sustainability involves the relationship between the business and the environment. It emphasizes the need to adopt more sustainable and ecologically friendly approaches while running the company to not impact Mother Nature negatively.
6. Nature of Regulatory Framework
While ESG and sustainability may share some regulatory frameworks, ESG frameworks are said to be less prescriptive – meaning they are less rigid or authoritative but tend to be more diverse.
On the other hand, sustainability frameworks are more prescriptive and vary depending on jurisdiction. Examples are the 2015 Paris Agreement, the USA Clear Air Act, and the European Green Deal.
7. Investment Perception
ESG is financially material, which means it can positively or negatively influence a company’s financial performance. ESG enables investors to determine a company’s cash flow and revenue growth, which are critical to helping them decide whether to invest.
In contrast, sustainability is more about sustainable investing, which focuses on long-term financial return and sustainability. This goes beyond typical ESG considerations and is thus more holistic. It’s socially responsible investing.
8. Key Terms
ESG and sustainability have specific terms that set them apart. Let’s look at them.
ESG Terms
- ESG Metrics: Also known as ESG data, ESG metrics are key performance indicators (KPIs) for evaluating ESG performance, such as waste management, carbon footprint, and greenhouse gas emissions.
- ESG Frameworks: These are standardized approaches for evaluating ESG performance, such as SASB, TFCI, and GRI, as discussed earlier in the table.
- ESG Factors: These are environmental, social, and governance factors essential to ESG investing and include human rights, climate change, and executive compensation, among others.
- ESG Scores: Also known as ESG ratings, ESG scores are assessments of ESG frameworks and ESG factors that investors use to evaluate a company.
- ESG Reporting: ESG reporting provides stakeholders with relevant information on a company’s environmental, social, and corporate governance performance.
- ESG Audits: Audits are practices for assessing a business’s ESG performance. They help identify areas for improvement.
- ESG Risks: Risks include negatives related to ESG failures, such as regulatory fines, reputation damage, and reduced investor confidence.
- ESG Opportunities: Opportunities include positives like improved profit, capital access, and better market share resulting from ESG involvement.
Sustainability Terms
- Biodiversity: Biodiversity is about the existence of different life forms and the impact of business on them. Overall, protecting biodiversity is integral to sustainability and maintaining ecological balance.
- Corporate Social Responsibility (CSR): CSR involves initiatives that ensure a business operates sustainably and ethically. Standard CSR practices include community clean-ups, charity work, and environmental sustainability.
- Sustainable Investing: This is where investors are interested in companies with stronger ESG strategies and more sustainable corporate practices.
- Sustainable Development: Sustainable development involves setting goals that meet present and future needs and business practices that balance environmental, social, and economic factors.
- Supply Chain: This is the network of people, activities, and organizations involved in product or service creation and delivery. It should adopt sustainable practices.
Do Businesses Need Both ESG and Sustainability?
Having compared ESG to sustainability, it’s normal to ask if one needs both or just one of the parameters. The truth is that corporate organizations need both, and one doesn’t replace the other. Here are the reasons why:
1. Cost reduction
ESG and sustainability efforts reduce waste disposal and increase resource efficiency, which translates to cost reduction. Both frameworks also contribute to practices of low energy consumption, leading to lower company costs.
2. Risk mitigation
Both ESG and sustainability involve identifying, managing, and monitoring risks. The frameworks enable company heads to take the proper measures to address risks when they occur and avoid potentially costly financial damages. The board, for instance, can realign its decision-making with its broader objective while managing risks.
3. Talent acquisition and retention
ESG and sustainability practices are key to attracting top talents. Social sustainability efforts like respect for human rights and social equality improve staff confidence, and most of the workforce will want to stay with the company. The same goes for ESG’s social metrics like inclusion and diversity, employee development, and corporate citizenship.
4. Brand image
In a world where consumers are becoming more socio-informed and environmentally aware, there’s a need for both ESG and sustainability practices. Stronger commitment to ESG and sustainability practices leads to better brand identity. Customers tend to trust and become more loyal to such a brand.
5. Competitive edge
One study shows that over 75% of customers would buy from a company prioritizing ESG. Another indicates that customers are always willing to pay more for eco-friendly products. The two studies affirm that ESG and sustainability offer a business that employs them a competitive edge, thus integral to attracting more customers.
6. Investor attraction
Investors recognize that companies with better sustainability practices and robust ESG performance drive better returns, and that attracts them. These investors inject capital into the business with a firm conviction that they’ll have their money back (with interest).
However, other than attracting investors, ESG and sustainability help retain them. Investors become more confident in the company’s leadership and willing to stick around for a while.
7. Increased revenue
Sustainability and ESG practices open room for innovative and newer markets, vastly improving a company’s sales margin and revenue. Also, by enhancing brand image, these frameworks give the business a competitive edge, as explained earlier, improving its revenue margin.
Embrace ESG and Sustainability Today!
There’s no doubt the need to integrate ESG into a company’s sustainability goals. While the two frameworks differ, their shared values, metrics, and corporate responsibility make them almost inseparable. Companies that embrace both ESG and sustainability efforts position themselves at an advantage in a world where environmental, social, and ethical matters must be prioritized.
We at the Center for Corporate Governance understand that, and consequently, we run a monthly corporate governance training program that addresses ESG vs sustainability, among other topics in the corporate world. Check out this new program to be empowered to navigate the corridors of corporate governance successfully!
