In building a more socially responsible company, you might come across two terms. At first glance, these terms might not make any sense. ESG strategies. “Global reporting initiative.” CSR and ESG factors. It all sounds very complicated, with little rooting in the real world, where social impact must take place.
However, once you understand these concepts—and how to manage them—it can be a difference-maker at your company. You can use them to set rules on responsible investing, sustainable investing, and corporate social outreach initiatives that reflect your values as a business. But it’s hard to do that if you can’t wrap your head around them.
What Does ESG Mean?
The acronym ESG is short for Environmental, Social, and Governance. Okay, maybe that doesn’t help a lot. But these are the three factors that companies often use to gauge the “sustainability” factor for a new investment they make. That includes an investment that comes in the form of charity.
ESG Criteria
E – Environmental:
Environmental stands for the environmental impact of your company, program, or investment. This takes into consideration a lot of factors including your total carbon footprint as a business which include your supply chain’s carbon emissions. This is where companies are shifting towards renewable energy to help curb their carbon emissions.
S – Social:
Social is for the societal impact of your company, program, or investment. This includes charitable giving, volunteering, programs in your community, stakeholder engagement, among others.
G – Governance:
This reflects the corporate governance of your company, program, or investment. The “G” is meant to help you focus on the systems you have in place to ensure you hold to your environmental and societal commitments.
ESG Origins
Originally, the concept was the three Ps: people, planet, and profits, or PPP. The idea that “profits” might factor into the sustainability of an investment might seem outdated now, but the concept was to include other elements in addition to profit considerations. When it came to the planet, issues like emissions and climate change factored in heavily. For “people,” it meant that the focus was on social issues, human rights, and ethical business practices. And of course, the final P meant an emphasis on capital markets, financial performance, and the bottom line.
These days, ESG might sound similar in concept. But the final letter for “profits” has been swapped out for “G”: governance. Good corporate governance is all about ensuring that an investment remains sustainable in the future. In this context, corporate governance refers to the rules and systems in place designed to vet investments and charities.
ESG Reporting
Because of the importance of ESG and ESG investing, ESG reporting has become essential to any major business. While companies put out financial reports for their financial health, ESG reports have become a vital part to a companies positive impact commitment. Reports will usually include ESG goals, the company’s ESG performance, along with any ESG issues. It’s generally a lengthy report and has mostly quantitative data, along with some qualitative info as well.
What Does CSR Mean?
Corporate social responsibility is how businesses regulate their own ethics and impact on the community. As opposed to ESG, which has a specific set of patterns that companies can use to look for metrics in their outreach efforts, corporate social responsibility is all about how a company goes about its work.
Corporate social responsibility can refer to lots of things, including:
- Directives from the board members. From the top of the company down, the concept of corporate social responsibility can start as a memo from the top brass, alerting management how to run things.
- Responsible investment. CSR can help regulate which investments a company makes. To use an extreme example, we wouldn’t expect a solar company to make substantial investments in high-pollution manufacturing facilities.
- Positive impact campaigns. Company volunteer programs, fundraising drive, and other social impact campaigns can be the most visible part of how a company lives up to its own CSR initiatives.
With corporate social responsibility, the emphasis isn’t necessarily on profitability. It’s on values like sustainability, positive impact, and responsible investing. Think of CSR as your company’s moral foundation. It’s through this prism that you’ll identify the best investment opportunities—and create the campaigns that maximize your social impact.
What is the Difference Between ESG and CSR?
While ESG is a broad rating of your company’s commitment to sustainability and other values, CSR is your company’s internal commitment to strong corporate values. Think of it this way: good CSR initiatives might help drive high ESG ratings.
With CSR, you’re looking to build accountability within the organization itself. With ESG, you’re looking to measure the accountability that already exists. Ideally, you’ll have a strong CSR along with strong ESG ratings. Both can provide ample evidence that your company is doing everything in its power to curb emissions, promote sustainability, and be a friend to human rights across the world.
Implementing ESG and CSR to Improve Sustainability and Responsibility
If you’re not familiar with these terms, it’s possible your company has been working on autopilot. Maybe the board of directors has worked from the best intentions, and that’s served you well so far. But until you start integrating ESG scores into the way you evaluate your business’s investments, you may not have a concrete idea of what this actually looks like.
ESG scores are simple to understand. It’s a way of quantifying a company’s commitment to Environmental, Social, and Governance priorities. Morningstar even offers a “sustainability rating” for companies that takes ESG scores into account.
What are ESG scores? They typically use publicly available data (such as emissions, humans rights concerns, etc.) and create a rating, often based on company surveys.
With this information in hand, it’s easy to see why companies focus on sustainable development when choosing new investments.
From the CSR perspective, it takes more than lip service to create new corporate values. It takes a top-down commitment. That often comes in the form of:
- Investing in new platforms for outreach campaigns.
- Creating new company-wide policies that incorporate CSR initiatives and values.
- Hiring third-party consultants and other assistance to build stronger CSR initiatives.
What are Examples of ESG?
Let’s get definite about what ESG looks like in the real world. To create that example, let’s take the first variable here: the environment. If a manufacturing company aims to reduce its emissions by 10% and meets that goal, that’s a solid example of a key performance indicator that could improve its ESG rating.
The “G” in ESG stands for governance. What does this look like? It includes the rules and guidelines you establish for making future business investments. We used the earlier example of a solar company that purchased a high-emission manufacturer: this would be an indication of weak governance, to say nothing about the environmental impact.
Ultimately, ESG and CSR are all about the same result: building a more sustainable world that promotes human rights. Whether that means making smart and sustainable investments or investing in local communities, it requires decision-making and conscious investors who are willing to make their impact on the world a greater priority.
