ESG and Sustainable Development: How are they Related?

Ankita Tiwari

17 Mar, 2023

The priorities of investment firms across the globe are changing. Investment Firms are focusing more on the environment and social issues which have given rise to two new buzzwords in the corporate world: ESG and Sustainable Development. The terms ESG and Sustainable Development are closely intermingled yet different. These two terms have become popular terms floating around the corporate realm. ESG and Sustainable Development have brought an ideological shift in the business responsibility by expanding it beyond the profit line. In this blog post, we will see how ESG and Sustainable Development are related despite their being different. Both terms address the environmental and social aspects of a business. In addition, we will also see how both ESG and Sustainable Development have developed as concepts independently.

What is ESG?

ESG stands for Environment, Social and Governance. Together they are known as the three pillars of the ESG. Each pillar has its significance and each pillar overlaps with the concept of sustainable development.

• Environment
  Under the environment pillar, the environmental risks such as corporate climate policies, energy use, natural resource conservation, pollution, waste management^[1], and animal treatment faced by a company are addressed.
• Social
  Under the social pillar, the company’s social relation with its employees, consumers, and investors is considered. It covers philanthropic donations and on the working environment for the employees.
• Governance
  Under the governance pillar, the management of the company and how well the management attends to the interest of the company’s stakeholders are looked at. It also focuses on complete and transparent financial reports along with ethical and legal management.

ESG is a set of ground rules applied by investors to evaluate an organization’s performance on specific criteria. ESG is used to measure an entity’s risk exposure to improve investment decisions. ESG is based on the Principles for Responsible Investment (PRI) proposed by the United Nations in 2006. Companies undertaking ESG investments see their business grow as these steps use private funds to transform or expand companies or to drive social change and are beneficial for the environment as well as society. ESG is a means to attain corporate business sustainability. In the present day, a company neglecting ESG will ultimately suffer significant damage to management therefore, ESG has become an essential practice for companies these days. Even customers, employees, and other interested parties have begun to demand company reports with ESG-related information. 

What is Sustainable Development?

The term ‘sustainability’ means the preservation of the environment specifically. Sustainable Development means development while keeping in mind the preservation of the environment. From a business perspective, sustainable development means the act of balancing the environmental, social, and economic needs relating to the organization in question. It means the development of a business while maintaining the natural environment and resources, ensuring no harm is caused to the biodiversity, and restoring the natural climatic cycles. The business also has to meet social sustainability by providing for the needs of employees, customers, and other stakeholders from charitable donations to establishing a healthy work-life balance for the employees. Finally, a business has to attain economic sustainability by achieving the business objective itself. Sustainable Development ensures that the company functions smoothly in the long run without depleting the environment or adopting any socially harmful practices.

ESG and Sustainable Development: Relation between the two

ESG and Sustainable Development are certainly the corporate buzzwords of the present time. Both address environmental and social issues and are used interchangeably however, they are distinct. ESG is a term preferred for investors and capital market to indicate specific criteria that remove ambiguity and identifies risks related to performance and accountability. ESG primarily applies to business structures and companies. ESG aids the company to measure and disclose performance. Sustainable Development is a sort of generic term it applies to everyone including individuals, companies, and countries as well. Sustainable Development includes ESG under its ambit. Sustainable Development in a business context is different for different business structures and is used to imply ethical and responsible business practices. Sustainable Development incorporates terms like green activity, corporate social responsibility (CSR), low carbon or carbon neutral businesses, conservation of energy, water, and other resources, green supply chain, etc. Sustainable Development depends on the three P’s i.e. People, Planet, and Profit line.

ESG and Sustainable Development are interrelated to multifaceted risks of social, technological, political, environmental and economic aspects. Both are used to mitigate risk and be future-proof.  With the increasing awareness to resolve the issues concerning the global environment and working conditions, more and more companies are adopting ESG and Sustainable Development for bettering their management benchmarks to ultimately receive long-term benefits. Implementing ESG norms help businesses to manage their environmental and social issues by determining the business risks and opportunities. Further, the United Nations has introduced Sustainable Development Goals (SDGs) which provide a framework for responsible investment. SDGs allow new and refined age affirmative action by undertaking responsible investing. Applying SDGs will mainstream and anchor responsible corporate behaviour.

In addition, businesses help their respective country achieve ambitious targets and manage climate change. Businesses have to care about their planet and people and this duty can only be achieved by sustainable development. The Sustainable Development of businesses includes transparent disclosures in the financial statement of companies. With time countries have framed laws on carbon taxes and integration of ESG rules in financial and banking sectors. Therefore, the ESG and Sustainable Development process is transitioning from optional to mandatory and robust development in sustainability and ESG strategies is taking place. ESG and Sustainable Development have also made companies more accountable for their actions. Companies are mandated to reduce carbon dioxide output or lose their license to operate. Further, inefficient sustainability policies also pull back companies and make it hard for them to catch up on the changes in the policies. Almost all countries have their focus on limiting global warming and achieving an economically optimal scenario. As a result of growing awareness in global companies, the companies have begun to plan their investments accordingly by setting net zero emission goals and defining de-carbonization strategies.

Conclusion

ESG and Sustainable Development improve the overall performance of the company. They are no longer new concepts. People are aware of it and countries are implementing laws on it so businesses have to take measures to incorporate ESG and Sustainable Development in their business practices and show definitive actions and results. The objective is to use resources only as much is needed so that the economic, environmental, and societal systems can have an indefinite existence. Thereby, making ESG and Sustainable Development essential business mantras for business.

Also Read:
ESG Metrics for Private Equity Investors
Shareholder Engagement and Corporate Governance: ESG Practices
Human Rights and ESG: The Intersection of International Law and Business Responsibilities