What is ESG and Why Does It Matter to Your Company

Photo by Kindel Media 

You’ve probably heard the term ESG (environment social governance). You may have heard it be interchanged with CSR (corporate social responsibility). Are they the same thing?

The answer is no. CSR and ESG, although promoting the same general concept, are distinct. CSR is everything a company does to positively contribute to societal issues that it’s not required to do by law or regulation. ESG is CSR that has been formalized into measurable criteria that are disclosed to investors and the public. As Lexology puts it: “While CSR aims to make a business accountable, ESG criteria make such business’ efforts measurable.” ESG criteria focus on quantitative data used to help investors, employees and consumers make decisions regarding a company. In essence, a company's ESG reporting shows if it’s “walking the talk” in terms of their CSR goals across:

• Environment. Measures how a company shields the environment from damage, including by minimizing carbon emissions, plastic pollution and solid waste creation.
• Social. Measures the company's relationship with employees, suppliers, customers, and communities, including wages, provision of healthcare to employees and grants to community organizations.
• Governance. Measures how the company governs itself in the CSR space including company executive pay, board diversity and shareholder rights.

There are several frameworks to help companies structure their ESG work, the most common of which are listed below.

• The Sustainability Accounting Standards Board (SASB) was designed for the information needs of shareholders and is used by more than half of the companies in the S&P Global Index.
• The Task Force on Climate-Related Financial Disclosures (TCFD) is a principles-based framework for climate-related financial disclosures.
  
• The Global Reporting Initiative (GRI) helps companies report on ESG in way that serves a broad range of stakeholders, not just shareholders. GRI reporting is the most widely used ESG reporting standard globally.

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Why should your company care about ESG? If your company executes ESG right, it’s likely to be more profitable. Also, investors increasingly expect companies to disclose ESG data. For example, the newly incorporated International Sustainability Standards Board (ISSB) is developing international ESG reporting standards and the US Securities and Exchange Commission (SEC) is incorporating ESG into its work. In summary, ESG is quickly becoming a standard part of managing a business.