Demystifying ESG: Understanding the differences between esg and Sustainability

Recently Elon Musk tweeted his discontent about ESG methodology, claiming it was problematic and "the devil incarnate." This sparked a debate about the true nature of ESG and its relationship with sustainability. ESG stands for Environmental, Social, and Governance, and it comprises a set of measures that companies set for themselves under pressure from investors, regulators, and customers. These measures can improve a company's internal decision-making processes, transparency, and accountability, building trust with stakeholders. However, ESG is not a guarantee of a positive environmental or societal outcome, nor is it the same as sustainability.

ESG is a set of metrics designed for a specific audience, namely all those related to the company's stakeholders and the possibility of gaining more profit. ESG ratings are investor-focused and show how mature a company's systems are, especially related to the governance side. ESG assesses how a company runs the business, not what it's in the business of.

Sustainability, on the other hand, as defined and implemented by the UN, is a set of measures for creating a system of value. It assesses inside-out impacts and risks, meaning how a company impacts the world and how the world impacts the company. Sustainability explicitly and consciously respects ecological ceiling and social foundation thresholds that define sustainability. It is open to all points of view and without the end goal of accumulating wealth.

Here are 3 key points to help you in understanding the difference:

1. ESG is a set of measures that companies set for themselves under pressure from investors, regulators, and customers. It serves as an indicator to evaluate their sustainability footprint by taking into account their ESG risk exposure and measuring the impact that they have on various non-financial ESG performance indicators.
2. ESG is not designed to align with planetary boundaries and is a single materiality proposition, whereas sustainability is a set of measures for creating a system of value that benefits everyone in the ecosystem, having a broader scope than ESG, and being aligned with both the UN's Sustainable Development Goals (SDGs) and planetary boundaries.
3. Given ESG and Sustainability are not the same, it's important to avoid Greenwashing and Competence Greenwashing within the industry. Sustainability assesses inside-out impacts and risks, whereas ESG measures what a company is doing and are fully investor-focused, and in that sense, they're not necessarily tied to sustainability performance.

In summary, ESG has a much stronger risk management angle, examining how climate change impacts the company's business activities (what they can get), which is very much unlike sustainability, which can take shape in any number or manner of corporate social responsibility (CSR) initiatives, and is focused mainly on the communal and global impact businesses can have through the choices they make and actions they take (what they can give).