ESG, sustainability and net zero are often used interchangeably, but they do not mean exactly the same thing. Each describes a different aspect of how businesses understand, manage and communicate their impact on the environment, society and wider economy.
In this introductory explainer, Polestar CF Partner Charles Whelan examines how the three concepts differ, where they overlap and why they are becoming increasingly relevant to business strategy and investment decisions.
Sustainability describes the relationship between a business and the environment, society and economy in which it operates.
For a business to be sustainable, environmental and social considerations need to be reflected in its market position, products, services and internal decision-making. Sustainability should therefore form part of the core business rather than operate as a separate or superficial initiative.
The concept is built around three interconnected pillars.
Environmental sustainability involves maintaining ecological integrity and ensuring that natural resources are consumed at a rate at which they can replenish themselves.
For businesses, this can involve considering the environmental effect of products, services and operations.
Economic sustainability concerns the ability of communities and individuals to access the financial and other resources required to meet their needs.
It also requires functioning economic systems and access to secure sources of livelihood.
Social sustainability encompasses human rights, access to basic necessities and the creation of healthy, secure communities.
It also includes the protection of personal, employment and cultural rights, together with preventing discrimination.
Business sustainability involves operating without creating a negative effect on the environment, communities or society more broadly.
It generally considers two principal questions:
A sustainable business strategy seeks to create a positive impact in at least one of these areas. Businesses should consider environmental, economic and social factors when making decisions and monitor the consequences of their operations.
This longer-term perspective is important because decisions that support short-term profitability could otherwise create future environmental, social or economic liabilities.
ESG stands for environmental, social and governance. It is a corporate governance and investment framework used to assess how a company manages these three areas alongside its financial performance.
Businesses adopting ESG principles seek to consider, measure, report and improve their environmental, social and governance performance.
Investors can use the same information when assessing a company’s performance and risk. ESG factors are therefore considered alongside financial characteristics when deciding whether to invest in a business.
Sustainability is the broader relationship between a company and the environment, society and wider economy.
ESG provides a framework through which aspects of that relationship can be governed, measured, assessed and disclosed.
In practical terms:
Sustainability might influence an internal decision to improve energy efficiency, electrify a vehicle fleet or purchase measurement software. ESG provides a way to assess and communicate the performance and risk associated with those decisions.
ESG can therefore be understood as a lens through which investors and other stakeholders view a company’s sustainability.
Measurement and disclosure are important, but ESG reporting alone does not create a sustainable business.
Competitive advantage comes from the strategy, culture, performance indicators and execution that sit behind the reported figures. Metrics should demonstrate the results of a genuine sustainability strategy rather than become the starting point.
Embedding sustainability within business strategy can support:
The potential value comes from the business changes themselves. ESG reporting provides evidence of those changes and helps stakeholders understand their effect.
The transition to a net-zero economy is a specific part of the wider sustainability agenda. Progress towards net zero can be measured and communicated through ESG reporting.
The shift towards a cleaner economy was expected to become one of the largest drivers of sustainable investment, supported by multi-trillion-pound investment across:
The transition has the potential to affect businesses across every sector. Companies preparing for that change may need to reconsider their operations, products, services and investment requirements.
The explainer identifies sustainability as a potential source of operational and strategic value rather than simply a reporting obligation.
Improvements to efficiency, innovation, workforce engagement, supply-chain resilience and risk management can strengthen how a business operates. These characteristics can also influence how investors assess its performance and resilience.
Businesses that do not prepare for the transition towards a net-zero economy could place their business models and valuations under pressure. Sustainability and ESG considerations are therefore relevant not only to environmental impact but also to long-term competitiveness.
The distinction between sustainability, ESG and net zero can help owners and management teams establish a clearer approach.
The themes within the explainer point towards several practical considerations:
The objective is not simply to produce more information. It is to develop a strategy that creates meaningful change and then use measurable evidence to demonstrate it.
The three pillars are environmental, economic and social sustainability. Together, they consider the effect of a business on natural resources, economic systems, individuals and communities.
ESG stands for environmental, social and governance. It is a framework for measuring and assessing how a business performs across these areas.
No. Sustainability describes the broader relationship between a company, the environment, society and the economy. ESG provides a framework for governing, measuring and reporting elements of that relationship.
Investors use environmental, social and governance information alongside financial information when assessing a company’s performance, risk and suitability for investment.
No. Reporting should follow a genuine sustainability strategy supported by the company’s culture, objectives, performance indicators and execution. Metrics provide evidence of progress but do not replace action.
Embedding sustainability within business strategy can support operational efficiency, innovation, employee engagement, supply-chain resilience, risk management and sales.
Net zero is a specific part of the wider sustainability agenda. It relates to the transition towards a cleaner economy, while ESG can be used to measure and report progress.
Sustainability can influence operational efficiency, resilience, risk and competitiveness. Businesses that fail to prepare for the transition towards a net-zero economy may place their business models and valuations under pressure.
A business should begin by understanding the environmental, social and economic issues relevant to its operations. It can then incorporate those issues into its strategy, establish performance indicators, implement appropriate initiatives and use ESG reporting to evidence progress.
