ESG and sustainability are two concepts that have gained significant prominence recently. The World Bank Group’s International Finance Corporation defines ESG as a set of factors that companies and investors consider regarding environmental, social, and governance issues. On the other hand, sustainability refers to organizations' actions to achieve their environmental, social, and corporate governance goals. This article delves into the relationship between ESG and sustainability and why they have become such critical considerations for enterprises today.
What Is ESG and How Is It Related to Sustainability?
Let’s start with ESG. The World Bank Group’s International Finance Corporation defines ESG as a set of factors that companies and investors consider regarding the “risks, impacts, and opportunities” of environmental, social, and governance issues. Those include:
- Environmental concerns such as climate change, carbon emissions, natural resource depletion, and pollution;
- Social considerations such as diversity, equity, and inclusion as well as other community- and employee-based concerns; and
- Governance issues related to how an organization is structured and how it operates as well as how it handles questions concerning ethics and risk management.
What about sustainability? Is it the same as ESG, or are there distinctions?
They’re two sides of the same coin. Sustainability initiatives are actions that organizations take to achieve their environmental, social, and corporate governance goals. Although the term “sustainability” is most strongly linked with environmental concerns, sustainability describes a perspective that encompasses social and economic health and environmental longevity.
How Important Are ESG and Sustainability for Enterprises?
Let’s look at a few examples to illustrate the importance of strong corporate ESG, starting with environmental sustainability. A study by the Economist Intelligence Unit revealed that hundreds of millions of people are concerned about the environment globally, and that number is growing, especially in newer markets. Consumer trends reflect this concern for the environment; global searches for sustainable products have increased by 71% since 2016.
Corporations in the beauty, pharmaceutical, clothing, and food industries in particular are responding by offering products that fit these labels. For example, the “clean beauty” market—which prioritizes products that are safe, ethically produced, and environmentally friendly—is estimated to reach $22 billion by 2024.
How did ESG gain such prominence? According to Christine Uri, the Chief Sustainability and Legal Officer at ENGIE Impact, the industry is the main driver of ESG progress in the United States. U.S. stakeholders such as shareholders, investors, and insurance companies are placing ESG considerations—and climate change in particular—at the forefront of corporate business agendas. Likewise, consumers, clients, and employees are expressing an increased interest in purchasing and working with sustainable companies.
But ESG and sustainability aren’t new concepts. What’s going on to make them such hot topics today?
Why Is There Such a Heightened Interest in ESG?
As we touched on above, consumers and stakeholders are beginning to insist that corporations behave more responsibly. That means ESG is essential for an enterprise’s continued success in today’s marketplace. But why has ESG assumed such an important role? There are a few reasons.
First, ESG issues themselves are intensifying. One of the public’s biggest concerns is climate change, which mental health professionals now consider to be a major source of stress. According to the National Institute for Health Care Management (NIHCM), 55% of people report feeling anxious about the impact of climate change. From water shortages and wildfires in the western U.S. to increasingly intense hurricanes and heat waves across the southern states, individuals are experiencing firsthand the effects of our changing climate—and they’re starting to demand that companies do something about it.
Additionally, smartphones have provided people with unrelenting, 24/7 access to news and social media, providing a greater awareness of ESG issues from racial disparities to corporate misconduct.
This increased appetite for enterprise sustainability demands that organizations take meaningful steps to achieve sustainability goals. But ESG isn’t just about responding to consumer pressure. Sustainability programs can also allow organizations to:
- compete with other enterprises in the marketplace,
- conserve resources and set themselves up for long-term environmental stability,
- lower their operating costs,
- gain the loyalty of their customers and clients,
- attract and keep quality employees by providing better working conditions and promoting shared values, and
- potentially avoid government investigation by demonstrating the ability to self-regulate.
ESG and sustainability have become crucial considerations for enterprises in today's marketplace. Consumers and stakeholders are demanding that corporations behave more responsibly, and organizations that prioritize ESG and sustainability are gaining a competitive advantage. Additionally, ESG issues such as climate change and social inequalities are intensifying, which is increasing the demand for corporate responsibility. Therefore, it is essential for companies to prioritize ESG and sustainability to achieve long-term success, conserve resources, lower costs, gain customer loyalty, attract quality employees, and demonstrate the ability to self-regulate.
To learn more about how ESG is affecting enterprises
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