Thought often used interchangeably, did you know that the terms “sustainability”—environmental sustainability in particular—and “ESG” (environmental, social, and governance) don’t mean the same thing?
Both share the word “environmental,” but it doesn’t mean the two are interchangeable. The main difference? ESG centers around financial risk and returns. Environmental sustainability focuses on supporting the planet’s health for generations to come.
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What is ESG?
Investors collect and score environmental, social, and governance data because it correlates to financial performance. The thesis is straightforward: Portfolios with solid ESG scores across the board tend to be resilient long-term performers.
What comprises an ESG score?
“E” includes environmental criteria like greenhouse gas emissions, energy use, and waste generation. “S” covers fair labor practices, diversity, and human rights. And “G” involves corporate governance like anti-bribery, anti-corruption efforts, and board diversity.
Though there’s been a push for better ESG standards in recent years, so much is left to interpretation. For example, strict ESG investors will only consider the most environmentally responsible companies, while less scrupulous investors might only weed out, say, companies involved in coal production.
According to the law firm, Sullivan & Cromwell, “[…] a number of ESG disclosure standards have been developed, and some have been incorporated into mandatory reporting regimes by non-U.S. regulators,” however, ESG disclosure by U.S. companies is still voluntary.
What is environmental sustainability?
Simply put: Environmental sustainability means operating within the planet’s limits. The 1987 United Brundtland Commission’s definition of sustainable development (now commonly referred to as just “sustainability”) still applies: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
Big picture, environmental sustainability includes minimizing carbon emissions—or even going carbon negative—to slow climate change. Specifically, that includes reducing resource use, doing more with less, investments in renewable energy or reforestation, water conservation, pollution prevention, waste reduction, protecting biodiverse areas, and technological developments that help solve environmental challenges, just to name a few.
Depending on the organization, impact potential can vary based on any number of factors. For example, take a nut company that grows its product in California, then ships it to Chile for packaging, then back to the U.S. for distribution. You can imagine its opportunity to cut its emissions footprint by finding a way to package in the U.S.
There’s also a growing emphasis on the link between environmental and social issues, like racial justice and income inequality. According to a Science Advances study, communities of color disproportionately deal with environmental repercussions like nearby highway pollution. The effects of climate change also cause a disproportionate amount of damage to communities with the fewest resources—monetary or otherwise. And they face more challenges when rebuilding and have fewer options to move away from areas affected by climate change.
How are ESG and environmental sustainability evaluated and regulated?
Environmental sustainability and Environmental, Social, and Governance (ESG) criteria represent two distinct but interconnected approaches to assessing corporate practices and impacts. While both aim to foster responsible business behavior, they diverge significantly in terms of regulatory frameworks and evaluative metrics.
Environmental sustainability: Regulatory frameworks and evaluation
1. Definition and scope: Environmental sustainability focuses on minimizing the ecological footprint of businesses, ensuring that natural resources are conserved and environmental degradation is minimized. It is concerned with long-term ecological health and the ability of the planet to support life.
2. Regulatory frameworks: Regulations governing environmental sustainability are typically prescriptive and can vary significantly by jurisdiction. Key global frameworks include:
- The Paris Agreement (2015): This international treaty aims to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. Countries set Nationally Determined Contributions (NDCs) that outline their plans for reducing greenhouse gas emissions.
- The European Green Deal: A set of policy initiatives by the European Commission with the overarching aim of making Europe climate neutral by 2050.
- The Clean Air Act (USA): This comprehensive federal law regulates air emissions from stationary and mobile sources to protect public health and the environment.
3. Evaluation metrics: Evaluating environmental sustainability involves specific, quantifiable measures such as:
- Carbon footprint: The total greenhouse gas emissions caused directly or indirectly by an organization, typically measured in metric tons of CO2 equivalent.
- Resource efficiency: Metrics such as water usage, energy consumption, and waste generation.
- Biodiversity impact: Assessments of how business activities affect local ecosystems and biodiversity.
These evaluations are often conducted through environmental impact assessments (EIAs), life cycle assessments (LCAs), and sustainability audits.
ESG: Regulatory frameworks and evaluation
1. Definition and scope: ESG encompasses a broader range of factors beyond environmental concerns, including social and governance issues. It integrates environmental impact with social responsibility and corporate governance to provide a holistic view of a company’s ethical footprint.
2. Regulatory frameworks: ESG regulation is less prescriptive and more diverse, often driven by market demands and investor expectations. Key frameworks include:
- The EU Sustainable Finance Disclosure Regulation (SFDR): Mandates disclosure of how financial market participants integrate ESG factors into their investment decisions.
- The Task Force on Climate-related Financial Disclosures (TCFD): Provides recommendations for companies to disclose information on their climate-related financial risks.
- The Global Reporting Initiative (GRI): Offers standards for sustainability reporting, covering a wide range of ESG issues.
In the U.S., while there is no federal mandate for ESG disclosures, various states and industry bodies have developed their own guidelines. The Securities and Exchange Commission (SEC) has also increased its focus on ESG disclosures, particularly climate-related risks.
3. Evaluation metrics: ESG metrics are multi-dimensional and can include:
- Environmental: Similar to environmental sustainability metrics but often framed within the context of financial risk (e.g., potential costs of carbon pricing).
- Social: Indicators such as labor practices, community engagement, and human rights. These might include workforce diversity, supply chain labor conditions, and community investment.
- Governance: Measures related to corporate governance structures, such as board diversity, executive compensation, and anti-corruption policies.
Evaluation of ESG performance is often conducted by third-party rating agencies such as MSCI, Sustainalytics, and Bloomberg. These agencies use proprietary methodologies to score and rank companies based on their ESG performance.
Does Sustain.Life support ESG or environmental sustainability?
Sustain.Life focuses on carbon accounting, namely calculating your company’s carbon footprint, helping you set science-based targets, and simplifying climate disclosures. Companies, private or public, and governmental organizations use the software to build and execute a roadmap to improve their environmental impact.
The tool also helps prepare organizations just starting their sustainability journey to report on the “E” of ESG down the road. Companies that aren’t ready to prepare a Task Force on Climate-related Financial Disclosures (TCFD) report, perform a climate scenario analysis, or develop a science-based target can get started with smaller actions first, then build up to more complex disclosures or analytics over time.
Without a doubt, both ESG and environmental sustainability are important. Understanding their differences can help you decide how to move forward with—or launch—your sustainability journey.
Sources
1. United Nations, “Sustainability,” https://www.un.org/en/academic-impact/sustainability Accessed June 7, 2024
2. Science Advances, “PM2.5 polluters disproportionately and systemically affect people of color in the United States,” https://advances.sciencemag.org/content/7/18/eabf4491 Accessed June 7, 2024
3. Task Force on Climate-Related Financial Disclosures, “TCFD Recommendations,” https://www.fsb-tcfd.org/recommendations/#core-recommendations Accessed June 7, 2024
