Companies are progressively recognising the importance of sustainability strategies for their image and long-term benefits, such as employee retention and driving sustainable capital growth. In that light, ESG (Environmental, Social and Governance), CSR (Corporate Social Responsibility) and Sustainability are terms used interchangeably these days and have become increasingly important in today’s business environment. In this article, we further discuss intertwining these terms, highlight the main differences, and explore these frameworks’ implementation.
What is Sustainability?
The United Nations Brundtland Commissions (1987) provided a vital blueprint for the definition of sustainability, which was described as follows:
“meeting the needs of the present without compromising the ability of future generations to meet their own needs.”
A company that integrates sustainability into its processes can positively impact the global and local environment, as well as the surrounding community and society while ensuring business resilience.
In business, the concept of sustainability is often framed within the ‘triple bottom line’, which prioritises not only profitability but also incorporates economic and social development while considering environmental impact through the ‘three P’s’:
- People: engaging with employees, consumers, and communities by promoting healthy work-life balance and community support.
- Planet: supporting biodiversity and preserving natural resources.
- Profit: by keeping your business profitable through diverse strategies in the short and long term.
Beyond the three P’s, purpose is key. Rather than focusing solely on profit, companies should prioritize purpose and start guiding their strategies with a vision of creating a positive impact that goes beyond financial gains to address societal and environmental needs.
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ESG and CSR both fall under the overarching umbrella of sustainability and serve as frameworks for businesses to demonstrate their commitment to sustainable practices.
When effectively implemented, ESG, CSR and sustainability collectively enhance financial performance, mitigate risks, and strengthen stakeholder relationships. To fully leverage their benefits, it is important to understand the unique role each topic plays within the sustainability framework.
Key differences between ESG, CSR and Sustainability
1. ESG (Environmental, Social and Governance)
ESG provides a measurable framework that investors use to evaluate a company’s ethical, sustainable and risk-resilient practices, focusing on long-term value creation. ESG focuses on assessing a company’s adaptability to environmental challenges, social expectations, and governance standards. ESG is highly data-driven and increasingly seen as a strategic necessity, and goes beyond traditional philanthropic efforts by focusing on measurable impact.
2. CSR (Corporate Social Responsibility)
CSR emphasizes voluntary corporate efforts to positively impact society and build goodwill, often focusing on community-level initiatives and short-term outcomes. While ESG provides a framework for investors, CSR focuses on voluntary corporate initiatives aimed at benefiting society, often independent of financial metrics. CSR often addresses environmental impact through initiatives like reducing their carbon footprint, improving waste management and supporting charitable causes.
3. Sustainability
Sustainability centres around long-term environmental and resource management to ensure ecological balance and business viability in the face of future challenges. Sustainability serves as a guiding principle for initiatives across ESG and CSR, focusing on achieving long-term ecological, social and economic balance.
While ESG provides measurable data and CSR focuses on specific initiatives, sustainability allows companies to tie these elements into a unified strategy.
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How does ESG fit into sustainability?
ESG provides measurable frameworks for tracking and reporting a company’s sustainable progress, enabling transparency and accountability in business operations. ESG establishes standardised criteria for investors to evaluate a company’s performance across three pillars: Environmental stewardship, Social responsibility and Governance practices (ESG).
- Environmental sustainability focuses on resource efficiency and innovation while minimizing the environmental impact through strategic decision-making.
- Social sustainability prioritizes equitable labour practices and diversity initiatives, ensuring inclusivity and community well-being.
- Governance encompasses a firm’s ability to integrate ethical, transparent decision-making processes while adhering to legal and regulatory standards.
Below are key ESG criteria used by institutional investors to evaluate corporate sustainability efforts:
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ESG data is typically categorised as ‘non-financial,’ showcasing information to investors that can affect the long-term value of the company. Since the creation of the Sustainable Development Goals (SDGs) in 2015 by the United Nations, companies have raised concerns about the cost of implementing sustainable initiatives and the challenges of measuring ESG performance, especially as it relates to long-term profitability and is difficult to measure.
What frameworks are applicable?
Depending on the company’s industry, size, and the most relevant ESG factors, a company can select frameworks that align with its specific sustainability goals. Companies have the option to voluntarily report their ESG performance using various frameworks. By doing so, companies can attract more investment, as investors increasingly seek companies who showcase a commitment to sustainable practices and long-term stability. A few examples of voluntary frameworks:
- Global Reporting Initiative (GRI): Offers a detailed taxonomy framework to classify and report ESG factors, and enables businesses to disclose their impacts transparently and comparably, ensuring alignment with regulatory and stakeholder expectations.
- Sustainability Accounting Standards Board (SASB): provides businesses the opportunity to disclose financial material that is related to ESG information.
- International Sustainability Standards Board (ISSB): provides businesses with the framework for disclosing ESG factors that are financially material and thus, relevant for investors[1]. In addition to voluntary reporting, companies within the CSRD’s scope must report on their sustainability policies and performance, focusing on key ESG areas.
The Corporate Sustainability Reporting Directive (CSRD) is an EU directive mandating companies to report detailed information on their environmental, social, and governance (ESG) impact. The European Sustainability Reporting Standards (ESRS) provide a framework for companies to report on their sustainability performance in alignment with the CSRD.
Corporate Sustainability Reporting Directive (CSRD)
Companies have been reporting on sustainability matters for years, but recent regulatory changes now require that this information be integrated into the financial statements, making ESG reporting a central part of corporate disclosures.
Since the introduction of the NFRD (Non-Financial Reporting Directive), companies with more than 500 employees have been required to report on ESG issues. However, this has now been replaced with the CSRD that broadened the scope to companies meeting two of the following three criteria:
- More than 250 employees (averaged over a year)
- Exceeding € 50 million of net turnover
- A balance sheet total of at least € 25 million
Companies are obliged to develop sustainability strategies alongside their financial plans to meet the requirements of the CSRD. Starting from 2025, mandatory sustainability reports will commence and the sooner your company will take action by complying with CSRD work, the smoother the reporting process will go.
This process is paired with internal transformation, including appointing staff responsible for aligning sustainability efforts with financial teams to produce the final report, which will include both financial and non-financial information.
The ESRS outline the reporting requirements under the CSRD. These standards aim to improve accuracy, transparency, and consistency with ESG disclosures, with gradual implementation beginning on January 1st, 2024:
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Where sustainability meets opportunity:
Integrating sustainability into core business processes is increasingly recognised as essential for driving long-term growth, and innovation and ensuring resilience in a changing market. Companies across the globe, both within and beyond the EU borders are already advancing towards a future that balances financial performance with long-term value creation through responsible business practices within its core business.
By adopting sustainable corporate strategies, companies align around one common objective: building sustainable businesses that also drive long-term profitability.
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