ESG and its differences from Sustainability
I would like to provide a more in-depth perspective on the distinction between ESG and sustainability. Despite the common use of these terms interchangeably, it is important to understand the differences between the two as it is crucial for businesses.?
ESG has become widespread in the business world and is now considered by many companies as a measure of the environmental, social, and governance aspects of their business alongside financial considerations. The primary reason behind the rapid adoption of ESG is the increasing interest from investors who now consider a company's ESG characteristics as part of their investment decision-making process.?
ESG is primarily a risk management and investment framework that evaluates the financial risks posed by environmental, social, and governance factors to a company's value. It adopts an "outside-in" perspective that is focused on the company and investor, seeking to minimize risks and increase the economic resilience of a company. This approach is not about being socially conscious or politically correct, but rather a way to manage financial risks and make good business decisions. The ESG ratings and indices used by investors are not designed to measure a company's positive impact on the environment and society, but instead, evaluate the potential impact the world has on a company's value and its shareholders.?
On the other hand, corporate sustainability adopts an "inside-out" perspective, focusing on the impact a company has on the planet and society. The people - and planet-centric approach aims not only to minimize harm but also to positively impact society and the environment. Pursuing a sustainable business model can be costly at times, such as paying a fair price to suppliers or investing in environmentally friendly materials. Despite the challenges, sustainability is a long-term investment and can create new markets, address changing customer needs, and attract and retain talent.?
For business leaders, ESG should not be seen as just a reporting exercise, but rather an opportunity and responsibility. Transforming a business towards sustainability can bring many benefits and is estimated to provide $12tn in business opportunities annually by 2030. Investors too, should not limit themselves to just ESG investments but also consider investments that contribute to a sustainable, inclusive, and just transition. A critical eye must be applied to ESG portfolios to screen for activities, technologies, and products that align with a cleaner and more sustainable future.?
In conclusion, ESG is a success story and will continue to play a crucial role in the business world. However, there is still room for improvement in terms of universal standards and transparency.?
ESG investment approaches??
In its most simplified form, ESG can be seen as?negative screening, which means not investing in so-called “sin stocks” – the shares of companies involved in the production of weapons, alcohol, tobacco, gaming, and fossil fuels such as coal, gas, or oil.??
It can also take the form of?norms-based screening, the exclusion of companies that violate some set of norms, such as the 10 Principles of the UN Global Compact.??
Investors may alternatively adopt a “best-in-class” or?positive screening?approach by selecting companies with an especially strong ESG performance compared with their industry peers.??
Finally, they might apply an?ESG integration?strategy in which all ESG risks and opportunities are included in the investment analysis and decision-making process.?