In this guide, you’ll learn the basics of ESG and sustainability, two critical components for modern business success. BPM draws on extensive experience in the areas of financial reporting, compliance and risk management. We integrate our knowledge into our approach to ESG.
This article will provide a foundational understanding of ESG and sustainability. You will learn how they differ and how to incorporate these frameworks into your organization from a wide range of functions, enabling you to drive positive change and enhance your corporate reputation.
What is ESG?
ESG stands for Environmental, Social and Governance. It represents a framework that stakeholders, primarily companies and investors, use to assess the impacts and risks of a company’s operations.
- Environmental factors focus on a company’s impact on the planet. This includes its carbon footprint, waste management and resource usage. The evaluation of companies depends on how they manage risks related to climate change, pollution and natural resource depletion.
- Social criteria examine how a company manages relationships with employees, suppliers, customers and the communities where it operates. This includes labor practices, human rights, diversity and community engagement.
- Governance refers to a company’s processes and structures that ensure its accountability, fairness and transparency. It assesses the company’s approach to issues such as board expertise, executive pay and shareholder rights.
Companies must increasingly incorporate ESG and sustainability into considerations of their financial performance, risk management and stakeholder engagement as they mature. The Sustainability Accounting Standards Board (SASB) and the International Sustainability Standards Board (ISSB) are frameworks that standardize ESG metrics crucial for this integration. Adhering to commonly used ESG standards enables companies to provide comparable data, crucial for informed decision-making. For investors, this transparency is essential in assessing corporate responsibility and potential for long-term success.
ESG score
Investors rely on accurate and standardized ESG data for their due diligence processes. They often turn to third-party ESG scores to evaluate companies’ environmental, social and governance performance. Prominent ESG rating agencies include CDP (Carbon Disclosure Project), Institutional Shareholder Services (ISS), Morgan Stanley Capital International (MSCI) and Sustainalytics.
Each rater has its own specific metrics and weightings. However, the overarching goal is to provide a comprehensive view of a company’s ESG or environmental sustainability performance. Their methodologies vary and emphasize different aspects of ESG, for example:
- CDP focuses heavily on environmental impact, particularly climate change, water security and deforestation.
- ISS emphasizes governance factors, including board practices, audit quality and shareholder rights.
- MSCI uses a wide range of indicators across ESG, with sector-specific weighting.
- Sustainalytics combines environmental and social impact with governance oversight, often used for risk assessment.
These scores influence how stakeholders, including customers, employees and regulators, view a company. A strong ESG score demonstrates resilience and adaptability in an ever-changing market landscape. This enhances an organization’s reputation, fostering trust and contributing to its ability to outperform its peers.
We often see ESG ratings and rankings as a company’s first indication of areas needing attention or disclosure. Clients frequently ask how much these scores matter and how to start improving them.
The answer depends on the needs, requests and communication from your company’s specific investors and financers. However, addressing ESG scores can always begin with disclosing existing activities and policies. It makes a great starting point.
What is sustainability?
Sustainability refers to the ability to maintain or improve systems and processes over the long term without depleting resources or causing harm. For businesses, sustainability is a complex, intersectional concept that goes beyond environmental concerns. It includes economic and social dimensions to meet the needs of the present without compromising the ability of future generations to do the same.
While ESG is a framework for assessing business risk and performance, sustainability is a multifaceted approach. It ensures that businesses meet the requirements and demands for more ethical and responsible corporate behavior. Central to the concept of sustainability is the triple bottom-line framework. Contrary to business as usual, the framework says business should focus equally on people, planet and profit.
- People: Ensuring fair and beneficial labor practices, community development and human rights.
- Planet: Minimizing environmental impact through resource conservation, waste reduction and sustainable production.
- Profit: Achieving financial performance that supports long-term viability without compromising environmental or social responsibilities.
By aligning with the triple bottom line, companies can create value not just for shareholders but for all stakeholders. This is called stakeholder capitalism. Sustainability plays a crucial role in fostering long-term resilience and a competitive advantage for businesses. By adopting sustainable practices, companies can mitigate risks associated with environmental degradation, regulatory changes and social unrest.
Sustainable businesses are better equipped to adapt to market shifts and consumer preferences, which increasingly favor environmentally and socially responsible products and services. Moreover, sustainability drives innovation, operational efficiencies and cost savings, enhancing a company’s ability to thrive in a dynamic and competitive marketplace. Ultimately, a commitment to sustainability not only protects a company’s reputation but also secures its future success.
Understanding the difference: ESG vs. sustainability
While ESG and sustainability share common goals of promoting responsible business practices, they differ in scope and focus.
Similarities:
- Both are strategic considerations for modern companies, executive teams, and investors.
- Both aim to improve corporate responsibility and long-term viability.
Differences:
- Strategic alignment: ESG integrates specific metrics into business strategies, while sustainability involves a holistic approach to maintaining overall systems and processes.
- Regulatory focus: Regulatory requirements and investor demands often drive ESG. Broader societal goals and ethical considerations influence sustainability.
- Measurement and reporting: ESG performance is typically measured by specific metrics. Sustainability involves assessing broader impacts and outcomes.
- Long-term viability vs. short-term performance: ESG tends to focus on short- to medium-term performance improvements. Sustainability emphasizes long-term resilience and systemic change.
It is important to note that ESG is often used synonymously with environmental sustainability, despite environmental sustainability being just one aspect of ESG. Sustainability, as a broader approach to business, means a company focuses on long-term viability. While there is an overlap in these concepts, sustainability, environmental sustainability, and ESG are different.
Environmental sustainability has clear measurement metrics, improvement strategies and disclosure frameworks. The majority of current regulations, disclosures and customer requests fall within this category of environmental sustainability.
ESG factors are integral to the broader sustainability framework, serving as measurable indicators of a company’s commitment to sustainable practices.
How to approach ESG and sustainability
How companies and their leaders handle ESG and sustainability depends on how advanced they are in their ESG journey. It often takes the following forms:
- Compliance: At this stage, companies focus on meeting regulatory requirements and avoiding penalties. Legal obligations and industry standards drive their ESG efforts. The approach is primarily reactive, ensuring adherence to ESG-related laws.
- Obligation: Companies address ESG issues to remain in business due to mounting stakeholder pressure. They go beyond legal requirements to meet broader societal, particularly customer, expectations related to their social license to operate. To demonstrate a commitment to sustainability, it’s important to implement foundational ESG initiatives, such as materiality and greenhouse gas emissions inventories.
- Performance: Companies actively seek to enhance their ESG outcomes, viewing sustainability as a strategic priority. They set targets and rigorously track progress. Dedicated resources are allocated to achieving specific goals.
- Integration: The company’s core operations and culture deeply embed ESG principles. From product development to customer engagement, a company interweaves sustainability into every aspect of the business. Companies at this level leverage innovative solutions and technologies, ensuring their business model is resilient and aligned with evolving stakeholder expectations.
Leveraging ESG and sustainability ahead of regulatory or customer mandates allows organizations to maintain a competitive advantage. It also enhances their reputation and contributes to a more sustainable future.
BPM’s ESG Advisory Services
As a tax, accounting and advisory firm, BPM offers comprehensive ESG support. We support you from taking the first steps to incorporating ESG in technical accounting. Our ESG and sustainability-related services include:
- Stakeholder education: Increase awareness about ESG practices, compliance, and benefits.
- Benchmarking: Compare your performance to industry peers and market leaders.
- ESG materiality assessments: Identify and focus on business-critical ESG areas.
- Climate risk readiness assessments: Assess your readiness for climate risk disclosure regulations and create a roadmap for compliance.
- Greenhouse gas emissions accounting: Measure, manage and report emissions.
- ESG reporting: Track ESG-related data and prepare disclosures aligned with global frameworks.
Our team is here to help you whether you know what’s next for your company or are still figuring it out.
Next steps for ESG and sustainability
ESG and sustainability are crucial for companies focused on long-term success. By implementing approaches outlined above, you can drive positive change, mitigate risk and further establish your company’s business resilience. Reach out to BPM to incorporate ESG and sustainability standards into your organization’s strategies, policies and key performance indicators. Contact us today to see how we can support your company’s long-term success.
