I have seen a growing number of organisations be for-profit or not-for-profit use the term ESG recently and it is clear that banks and financial institutions have shed light on ESG.
What does ESG mean?
Environmental, Social and corporate Governance. There is further information on a previous post but in summary, it is mainly used for investments to gauge the importance of such metrics along with financial ones. Organisations such as MSCI audit and screen potential investments to rate their performance for asset managers and owners. ESG funds thus mean that companies are top performers when considering a certain balance of their ESG and financial metrics. Hence why Apple and Amazon end up there (yuk). For instance, governance doesn’t prove any sustainable doings but gives good foundations for a company to implement something should they wish for have a sustainable future. Not only ESG ratings support conscious investors but they also encourage companies to follow that trend. Besides, there is a belief that governance will sustain companies’ future and encourage them to improve, as they are now aware of the risks (i.e. ethical, environmental or financial) in their organisation. For instance, a good governance structure would not rely on one supplier for an essential tool or take into consideration political instabilities that can trickle down to disrupt production. Also a good governance structure will be ready to investigate misconducts before it turns into a PR scandal.
As explained above you can score high on ESG while your operations do not focus on sustainability. The terms of ESG, sustainable investing, responsible investing and sometimes impact investing are often used interchangeably. However, one can understand how ESG does not guarantee sustainability. It does not require balancing economic, environment and social and even less to put its head over the parapet and push the industry. In fact, many managers rely on ESG certifications to add the organisations in funds without considering whether these certifications are trustworthy in certifying sustainability – I really need to write something on certifications. The cost of certifications, in time spent to complete them and directly to the certifying body, benefits larger corporations therefore they are over represented in ESG ratings without actually doing “sustainability”.
More importantly, ESG and sustainability are not the same. A sustainability report cannot be replaced by the name ESG, it can rely on ESG information but they are not the same.
What is sustainability when it comes to businesses?
A sustainable business is… well that was a question I asked myself for a full semester. Does it even exist? Arguably, the products and operations of the business have to be for the common good and sustaining either decarbonisation, regeneration or an alternative to existing harmful practices. A way to do better at least.
Sustainable businesses set themselves out for the long term while ESG requires “policies” in place that can be wiped up in minutes. Sustainability is not something that can be graded against a metric or can be achieved against criteria. That is not to say that these metrics are not useful and principles give foundations to sustainability rather that ESG criteria aim for something while sustainability is a process and a way to do things so that we manage our resources and future generations can enjoy them.\
ESG criteria and reports as well as sustainable concepts are all necessary to create a better world but they need to be differentiated. Many people who are trying to grapple with sustainability – including Elon Musk recently – are jaded by ESG ranking and the mark up of sustainable funds. So am I! I cannot believe that the tool used to rate sustainability has become a shortcut to reframing a deep societal concern. But the rate of business does not allow for deep reflection and quick profit also are not satisfied by spending time reflecting. However, ESG was always a simple tool to facilitate adoption and compare different organisations and not aimed to be a goal for sustainability.