Sustainability and ESG (environmental, social, and corporate governance) investing are concepts with a lot of momentum. They have had growing attention over the past few years, especially as people become more aware of their impact on our planet and how this can have long-term negative consequences.
With so much noise in the industry, it’s natural for companies to ask which is more important. Sustainability or ESG? While they’re very similar, there are some important distinctions to note. Sustainability and ESG aren’t mutually exclusive, but understanding how each term differs can help you make more informed financial decisions.
In this article, we explore the key differences between sustainability vs. ESG and explain why both concepts are so important for investors and businesses.
The concept of sustainability is becoming more prevalent in the business world, as organizations are recognizing the importance of creating profitable products and services while minimizing negative impacts on the environment and society.
Sustainability is generally concerned with environmental factors such as greenhouse gas emissions, water use, and energy consumption. It can also include social factors such as workers’ rights and diversity in the workplace.
Most people are familiar with sustainability, but ESG is a more encompassing term that goes beyond just environmental impacts. The concept of ESG investing has been around for many years, but only recently has it gained real traction among investors.
ESG investing measures a company’s overall sustainability regarding environmental, social, and governance risks. The two concepts overlap in many ways, but ESG takes sustainability further by including governance. The idea behind governance is that companies must follow the same laws and regulations that apply to governments.
At the most basic level, sustainability and ESG are concepts that aim to measure and manage a company’s exposure to risk. The difference lies in the approach to measuring risk and how companies can manage it.
Sustainability considers how a company’s business practices and products impact the environment. When measuring sustainability, companies look at things like greenhouse gas emissions, water use, and energy consumption. Sustainability also looks at economic factors such as the company’s ability to generate revenue and profitably scale business operations.
ESG takes a more comprehensive approach to measuring risk, including a company’s social and governance practices and environmental impacts.
Investors who take the time to study both sustainability and ESG companies will find that many of them are actually working towards the same goals. However, the distinctions between the two are essential for companies to improve their performance in different areas.
When it comes to investing, companies can improve their overall ratings by focusing on different aspects of sustainability and ESG. For example, a company that scores well in sustainability but poorly in governance would improve its rating by focusing on minimizing corruption within its operations. The main difference between the two is that sustainability exclusively focuses on environmental impacts, while ESG considers social and governance factors.
Investors who consider sustainability and ESG when making financial decisions can benefit greatly. They can choose better companies to invest in and better funds to include in their portfolio. They can also avoid companies that are unsustainable or treat their employees poorly. This can help them sleep more easily, knowing that their investments won’t negatively impact the planet or other people.
Additionally, if you’re trying to diversify your portfolio, you can choose funds considering sustainability and ESG. This can help you avoid over-investing in one industry and spread your risk across a broader spectrum of companies. Sustainable funds are also likely more diverse because they include companies from a variety of sectors.
Each year, thousands of companies publish their sustainability and ESG reports. The information in these reports is key to future success for investors and companies alike. Companies can use the information in these reports to identify areas for improvement and set future goals.
For example, a company that scores poorly in sustainability can set goals to reduce greenhouse gas emissions and improve energy efficiency. Similarly, investors who read sustainability and ESG reports can make more informed investment decisions.
Understanding how a company ranks in sustainability and ESG can help investors know whether a company is a good long-term investment.