As digital technology provides greater communication and transparency about corporate policies, both consumers and investors are eager to see companies invest in sustainability. Corporate sustainability is concerned with the delivery of goods and services in ways that benefit the environment, the community and the company’s economic success. To achieve sustainability, executives must often revolutionize business practices and implement new programs to monitor processes and identify areas of improvement.
Yet, two of the most important corporate sustainability programs are often confused, even by the most experienced executives. Here are the differences between environmental, social and governance (ESG) and corporate social responsibility (CSR) — and how they both fit under the umbrella of sustainability.
What Is ESG?
ESG is the combination of three criteria that tend to be critical for understanding an organization’s long-term sustainability. These criteria include:
Environment: Environmental criteria involve corporate policies and procedures that directly impact the natural environment, such as energy use, waste production, pollution, natural resource conservation, animal treatment and more.
Social: Social criteria are concerned with the company’s relationship with its various stakeholders, who include customers, employees, shareholders and more.
Governance: Governance criteria ensure that a company is committed to compliance with all laws and regulations affecting business and industry. Examples of governance standards are accurate and transparent accounting, integrity and diversity in leadership and avoidance of political contributions for preferential treatment, among other ethical and law-abiding activities.
ESG valuation is incredibly important; in fact, it is so indicative of corporate sustainability that ratings agencies like S&P collect and index ESG performance scores to provide insights to investors. Shareholders are increasingly seeking reflective and progressive policies in every realm of ESG, with the effect that capital totaling over $649 billion poured into ESG-linked funds in 2021.
It is worthwhile to note that different investment firms will rate ESG performance based on their own priorities rather than the goals of the company. What’s more, these priorities are apt to shift as environmental needs, social pressures and governance concerns change over time. Still, leaders would be wise to perform their own evaluations of corporate ESG and make changes to improve the sustainability of their policies.
What Is CSR?
CSR is a management concept designed to help a company make a positive impact on its surrounding communities. Often, CSR involves environmental and social actions, like striving to lower their carbon footprint, investing in fair trade materials, participating in volunteer work and engaging in charitable projects. Generally, CSR is about the emotional impact of its policies on its stakeholders, which drives high morale, high engagement and high sustainability.
CSR was once merely an admirable business practice, but as consumers and employees become more socially conscious, CSR has become an imperative for organizations looking to survive and thrive into the future. Several national and international organizations have published voluntary standards to help push companies toward better CSR. For example, the International Organization for Standardization created the ISO 26000 in 2010 to translate CSR principles into practical actions that can be taken by business leaders.
Many business leaders understand CSR as a means of balancing economic, environmental and social obligations, but to do so effectively, leaders need to develop a CSR model that facilitates reporting. Then, not only does business leadership have a better understanding of the effectiveness of their CSR policies but they can publish their reports to improve their reputation with stakeholders and the general public.
Why Does a Business Need Both?
There is plenty of overlap between ESG and CSR, but the two are not identical. Though both ESG and CSR are concerned with a company’s sustainability, each focuses on different aspects of the same environmental and social issues. CSR tends to be a general framework for better corporate behavior, while ESG is a measurable assessment of an organization’s policies and practices in certain realms. CSR is qualitative, while ESG is quantitative. Thus, an effective organization must engage with both to achieve real and long-lasting sustainability.
Successful organizations are not guaranteed sustainability. Business leaders need to employ strategies like CSR and ESG modeling to continue achieving success into the future. To better understand sustainability strategies, executives might engage with sustainability courses, which can provide more insight into developing the right ESG and CSR models.
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