The terms ‘sustainability’ and ‘ESG’ are used in different ways in the literature and in organisations.
In some ways, this makes our work as sustainability practitioners exceptionally hard. In other ways, the fact that there are no universally agreed definitions for key terms is a useful constraint. It forces us to clarify what they mean in relation to our particular context which is always a good thing when what you are dealing with is emergent.
I reflect on what these terms mean for every organisation I engage. My starting points for these reflections are as follows:
- ESG and sustainability both seek better decisions and action in relation to society and nature in order to reduce negative impacts and improve organisational resilience.
- The term ‘sustainability’ is more commonly used in a broad sense. Sustainability is multi-horizon in scope (short, medium and long term) and considers aspects pertaining both to the organisation and to its broadest set of stakeholders (including society as a whole). This broader scope recognises that issues material to a given organisation’s operation and strategy can arise from beyond the narrower set of stakeholders formally engaged by an organisation.
- The term ‘ESG’ is used primarily by the investment community. It typically refers to a subset of sustainability aspects, and specifically to those that have a financially material impact on the organisation’s cash flow over a reasonable period, but not the long-term. This approach does not consider society as a whole to be a material stakeholder. Accordingly, it focuses only on those parts of society that are directly related to the value proposition of the organisation (its funders, employees, customers, suppliers and so on).
The conceptual difference between sustainability and ESG is small but the politics generated by this difference is not. It split the global community seeking to ‘harmonise’ investor ESG disclosure requirements. Although the IFRS and their ISSB won the day with the issuance of the “sustainability” (actually ESG) disclosure standards in June 2023, the debate is not over and receded only somewhat when the ISSB signed a memorandum of understanding with the more broadly-scoped Global Reporting Initiative in March 2022.
As you explore what these terms mean for your organisation – and whether the difference is actually material beyond your core practitioner team, which I doubt – consider keeping an eye on the following:
- ESG has rapidly become the dominant view (follow the money) but not all stakeholders agree that it is the better way to think about integrating sustainability into organisational decisions and actions
- A broader ‘sustainability’ view can be useful if early detection of sustainability risk is important
- Standardisation of ESG disclosure has increased the fiduciary duties of executives and boards, along with the organisation’s short term risk of non-delivery on disclosure
- While standardisation is necessary to prevent diverging disclosure expectations from deteriorating into chaos, important local nuances will be lost in the global drive
- Addressing ESG disclosure requirements is a necessary focus but not a sufficient one from a competitive strategy point of view. More on this later in ‘Do investors score an own goal with ESG?’.
I will happily admit that my initial response to the rise of ESG investment was to use the terms synonymously. This was tactical because the difference felt too nuanced to be useful and any word with six syllables is a bad way to open discussion with busy executives. Jon and I disagreed and I now incline towards his view. (Space for disagreements makes Incite a fun place to work.) While I start every engagement by briefly discussing the difference, I am clear that using the terms interchangeably is not a crime if the level of nuance is not relevant to the task at hand.
Fortunately, most of my work falls into this category so I am gently sliding back to my old habits.