Sustainability vs. ESG

Are ESG and sustainability interchangeable terms? And if you get it wrong, does it matter?

The question is topical for corporates, who are currently gearing up for annual reporting. ESG, sustainability and other permutations such as CSR tend to be bandied around interchangeably online. But their meanings are different and depending on which you choose, you are saying something different about your business.

It's all about impact

Broadly, sustainability is about the world and the company’s place in it: the impact it has, and how it is managing issues ranging from climate change to human rights to ensure its contribution is within the world’s “safe” environmental and social limits.

ESG, on the other hand, is a subset of sustainability, primarily used by investors. It’s a framework to assess the impact of topics related to sustainability on a company's financial performance and long-term business continuity. It’s assessed via ratings and indices such as FTSE4Good and MSCI, and via information disclosed in annual reports and sustainability reports.

Differences matter

The differences matter because they indicate variations in how companies actually operate.

Looking at the world through a sustainability lens leads to change within the business. Asking the question: “How exactly is this company contributing to global heating and what can we do to reduce that impact?” yields a different result from collecting emissions data required to complete an ESG ratings questionnaire.

The increasing amounts of data demanded by investors CAN be extremely useful in guiding sustainability decisions. But equally, it can be seen as a way to pursue business-as-usual.

In practice, then, forward-thinking companies need to use both terms. They should explain their sustainability journey, focusing on planetary and social boundaries and real changes to the business. And their corporate reporting should include the necessary disclosures and metrics that enable investors to make decisions.

Conflating the two terms muddies the water for everyone – and tends ultimately to prioritize investor concerns over other stakeholders.