“Without restoring an ethos of social responsibility, there can be no meaningful and sustained economic recovery.”
———–Jeffrey Sachs, an American economist, academic, and public policy analyst
Prelude
Let’s get real, this discussion on ESG and CSR is entirely a business case. Paying attention to the environmental, social, and governance concerns does not compromise returns; rather, the opposite. Furthermore, businesses that invest in these concerns are more likely to stay in the market in the long term. Consumer habits are changing towards spending their money with companies that exhibit such problems.
The modern world is a dynamic place, with great competition, constantly changing markets and rapid technological change. Global ways of doing business have changed very fast in the past years, and international sustainability policies are evolving rapidly. Every form of business operates in an environment that impacts society and has a governance structure. Companies have to be highly flexible, as these aspects are all intertwined and therefore make strong ESG propositions.
ESG – first things first
Environmental, Social, and Governance, in short ESG, can be described as a framework for analyzing companies and assessing how well they compare to their peers in terms of performance against specifically defined metrics. Under the auspices of environmental aspects, issues addressed include waste production and management, water usage, and more general ecological behaviour, such as how efficiently businesses manage their resources. Finally, but most imperatively, how they are protecting and preserving the environment around them.
Under social, here it’s primarily how thriving companies treat their internal and external clients, focusing specifically on how they engage with their employees. In addition, other aspects like diversity within the company and its management structure grab particular attention. Lastly, under governance, here it’s mostly about governance structure within the business and how well the business operates.
Considering all three aspects, what one observes is another way of assessing a company without looking at its financial statements. Here the focus is how companies impact the broader society at large. In a nutshell, ESG can be dissected into these elements but not limited to it, Environmental (energy, resources, Carbon emission, etc.), Social (relationship with people, institutions, labour relations/law, diversity, and inclusion), and Governance (Internal systems and structures, control, processes, practices, compliance to the law, effective decision making, etc.).
ESG investing is widely heard in conversations today. Investors are increasingly applying these non-financial factors to identify material risks and growth opportunities as part of their analysis process. ESG metrics are not commonly part of mandatory financial reporting, though companies increasingly make disclosures in their annual report or a standalone sustainability report. Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD), are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
As companies and investors look to the ESG investing metrics, it has led to an accelerated demand, and several key trends are emerging – from climate change to social unrest. The current coronavirus pandemic, in particular, has intensified discussions about the interconnectedness of sustainability and the financial system. Moreover, with more companies creating and implementing CSR policies, they stand a better chance to stay in business for the future.
No one size fits all
ESG does an excellent job in terms of how well one company is doing compared to another company. However, it is less good at looking at what is the overall mission of a business. As it does not dive into the matter in terms of companies out there do good, and if so, how do they manage that? Another pitfall is that it is just a framework.
The reality is that many companies have different views around what is more essential for them. For some companies, it’s around environmental aspects, yet it is a social issue for other companies, and the rest its governance issues that are their top priority. So as many companies as there are around, there will be different opinions on what is essential. So there has to be some degree of compromise around how the ESG framework will be applied.
Looking into the DNA of ESG, it is a combination of self-reporting and analysis done by analysts who zoom in on the company’s factsheets, regulatory reporting, etc. Hence, the general tendency is that we get better reporting from established and larger companies. But in some cases, there is also good reporting from medium to small enterprises.
CSR vs. ESG on a comparison scale
ESG is an overall assessment of a company’s commitment to sustainability and other values, while CSR is an internal assessment of a company’s strong corporate value. Think of it this way. A good CSR initiative will help you achieve a high ESG score.
CSR attempts to increase the accountability of the organization itself. ESG attempts to measure existing debt. Ideally, your CSR and ESG assessments should be solid. Both can provide plenty of evidence that your business is committed to reducing emissions, promoting sustainability, and being a companion for human rights around the world.
Improving Sustainability with ESG & CSR Implementation
If you’re not familiar with these terms, your business may be on autopilot. However, you may not have an accurate idea of what it looks like until you start incorporating your ESG score in a way that evaluates your business’s investment.
ESG score is easy to understand. It is a way to quantify a company’s commitment to environmental, social, and governance priorities. So what is an ESG Score? They often use publicly available data (programmes, human rights issues, etc.) and often create business research-based assessments. With this information at your fingertips, it’s easy to see why companies focus on sustainability when choosing a new investment.
From a CSR perspective, creating new business value requires more than just respecting words. It requires top-down participation. It usually looks like this:
- Invest in a new awareness campaign platform.
- Create a new company policy that integrates CSR initiatives and values.
- Recruit third-party consultants and other supports to build more robust CSR initiatives.
ESG examples to steer by
Let’s take a closer look at what ESG looks like in the real world. To create an example, let’s assume the first variable, the environment. If a manufacturer sets a target of reducing emissions by 10% and achieves it, this is an excellent example of a key performance indicator that can improve ESG assessments.
The “G” in ESG includes the rules and guidelines you will establish to make future business investments. However, it presupposes an example of a solar company that purchased a high-emission manufacturer: this would indicate 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 intelligent and sustainable investments or investing in local communities requires decision-making and conscious investors who are willing to make their impact on the world a greater priority.
When things fall apart
Things fall apart mainly when businesses do not recognize the needs of others. In our recent history, it has shown how devastating it can turn out to be. Take, for instance, the 2008 financial crisis. This man-made catastrophe kicked off when banks and other companies created financial products they knew were unstable. Since they were confident they could profit even if many people suffered, they sold them anyway. As a result, a select few became rich, while millions of people lost their homes and livelihood.
This type of greed, unrestrained by moral codes, erodes the trust and cooperation needed to have a functioning society. Moreover, this is a dangerous idea because it leads businesses to seek short-term goals and profits rather than higher goals such as ESG and CSR.
In the final analysis
Do companies have to define to themselves what is essential for them? Using the ESG framework can help companies avoid companies with bad practices and irresponsible business dealings. CSR and ESG offer a strategic way to holistically infuse and integrate responsibility into all aspects of a company, facilitating returns at every level, environmental, social, and governance.
A better way for businesses to improve is to act in service of the communities and societies they operate. Companies that strive to be sustainable make CSR and ESG integral to all aspects of their businesses as an engine for innovation, profitability, and purpose.
References
Sanford, Carrol (2011): The Responsible Business: Reimagining Sustainability and Success. Jossey-Bass.
Kofman, Fred (2007): Conscious Business: How to Build Value Through Values. Sounds True Inc.
https://blog.milliegiving.com/esg-vs-csr/ [Accessed August 1, 2021]
https://www.investisdigital.com/blog/esg-and-sustainability/how-are-esg-and-csr-different [Accessed August 2, 2021]
https://www.gartner.com/en/documents/3991078/what-s-the-difference-between-csr-and-esg- [Accessed August 2, 2021]
https://www.thomasnet.com/articles/other/csr-vs-esg/ [Accessed August 2, 2021]
Financial Times
www.mckinsey.com [31/07/2021]
www.cfainstitute.org [31/07/2021]
About the Writers:
Romein is a (self-confessed) Pan-Africanist by heart. His diversified professional career spans many different sectors, i.e., local government, mining, consultancy, construction, advertising, and development cooperations. He has an MBA in CSR and various qualifications in engineering, environmental health, and leadership. Romein is the Head: Business for Development at PIRON Global Development, Germany (www.piron.global). Contact him via ([email protected])
Ebenezer is a Development Communication Specialist, an SDG Mkt Building & SME Researcher and Finance & Investment Nomad. He`s Ag. Country Director with PIRON Global Development GmbH, Ghana (www.piron.global). Contact him via ([email protected])
Irene is a serial entrepreneur. She has vast international working experience in various capacities. Bonjeh is a seasoned project manager and marketer. She holds a Master’s degree in Globalization and Economic Development and an MBA (CSR & NGO Management). Bonjeh is a Project Manager with PIRON Global Development (www.piron.global) and based in Cameroon. Contact her via ([email protected]).
