While business attention on sustainability issues is not new, there has been an explosion of interest since the late 1990s and early 2000s, as a consequence of pressures from social movements, corporate scandals and a growing awareness regarding environmental degradation and climate change. Hundreds of new corporate sustainability guidance, standards, and tools have appeared as business seek a ‘golden rule’ to implement socially responsible initiatives, with the influx at times leading to confusion among managers, CEOs, and investors.
So, how is the corporate sustainability ecosystem organised?
From a business perspective, corporate sustainability has been reflected in (typically) voluntary commitments made explicit through corporate social responsibility (CSR) initiatives. CSR would be then anything that a business does to respond to society’s expectations beyond the minimum legal requirements. This sounds right, but it has one key limitation. Top managers and the Board of Directors have frequently prioritised shareholders’ expectations in the short term (let’s say a year). As most shareholders would like to see a return on their investment, profit maximisation became the main metric of company success. This implies that sustainability has not been central to the way companies are managed and valued.
The solution? A greater focus on the role of finance in promoting sustainability will definitely help. This is what is happening today, and it has been happening for a while now. The integration of CSR to finance and investment decisions has shifted the debate to the concept of sustainable finance and its broad operationalisation as environmental, social, and governance (ESG) issues. Both concepts, CSR and ESG, are then virtually the same as they attempt to promote greater responsible business conduct. Of course differences exist. While CSR focus on what socially responsible things we do, ESG is the way me measure our sustainability performance (and publicly disclose it).
So, now that this is clear, let’s try to organise the CSR/ESG ecosystem. All the CSR/ESG instruments can be classified in three categories: 1) frameworks, 2) standards and 3) rankings/ratings. Frameworks refer to principles or guidelines on how sustainability issues should be managed and disclosed (e.g., OECD Guidelines for Multinational Enterprises, Integrated Reporting). This is basically a set of principles to guide business conduct towards greater sustainability. Standards, on the other hand, exist in the form of formal documentation that set requirements and specifications on what to do and disclose (e.g., GRI, SASB). They can be specific actions that a company should implement or specific indicators that a company should measure and ultimately disclose. On the other hand, rankings and ratings are a third-party evaluation of a company’s ESG performance. They basically provide a benchmark on how well a company is doing in terms of sustainability. The challenge here is to link company ESG performance with ESG impact, but this is something we will discuss another time.
The ESG ecosystem is progressively becoming part of mainstream finance and investment. However, there are still a number of aspects we need to discuss before we can go in the details. In our next blog we will discuss more in detail the concept of green and sustainable finance and how is impacting business and consumers.
By Luis D. Torres, PhD.
Associate Director in ESG and Impact
Certificated Green and Sustainable Finance Professional