Sustainability vs. ESG?

Does it matter if we call it Sustainability or ESG?

Jon Hale and Andrew Winston raise an important question about using ESG versus Sustainability in their recent Morningstar and MIT Sloan Review articles.

The sustainability field has struggled with this since the beginning.  My 1999 Guide to Sustainable Community Indicators included 20 different definitions of sustainability. Each touched a different facet, resonated with different people, showing them why sustainability mattered in and to their community.  

Since then, I’ve seen businesses go from reducing toxics use to eco-efficiency and now zero carbon and net positive. And I’ve watched the investing world move from corporate responsibility to SRI and now ESG and sustainable investing.

I love the term ‘sustainable investing.’  I’ve been teaching myself investing—joined an investing club, read lots of books and articles (I still only know enough to be dangerous, so don’t ask me for investing advice). As with any new field, I learned lots of initials—PE, EBITDA, EPS, and Greek letters, alpha, beta... I’ve also learned the importance of metrics for long-term investment decisions. Not just any measurement, but commonly agreed-upon, standardized, reliable, relevant, transparent measurements. The finance field has spent over a century developing standards for measuring and reporting. The sustainability field is decades behind and we don’t have many decades left.

Sustainability needs to be made actionable and that means making it measurable.

Over the last 30 years, we’ve made progress with measurement and reporting standards with our own set of initials—GRI, CDP, GHG, SDGs, SBTi. We need more progress faster.

So having the investment community take up arms for ESG is incredibly heartening. ESG isn’t ‘cooler’ than sustainability, but it has a growing body of standardized metrics behind it. Rapidly consolidating frameworks & metrics (CDSB, SASB, IIRC, TCFD, ISSB) is putting precision to what it means in a way that ‘sustainability’ cannot. As a long-time sustainability indicators data geek, I think that’s the coolest thing ever. And the push by security regulators around the world to require disclosure of material sustainability risks means companies are paying attention as never before.

Standardizing sustainability disclosures also takes metrics beyond the yes/no of ‘is there a policy?’ to metrics on actual carbon emissions with targets based on science, not simply ‘avoided’ emissions. How many sustainability reports tout reducing carbon emissions per widget by 50% while their financial report touts tripling sales of widgets? With standardized metrics, organizations like Morningstar can have a Sustainability screen for funds and equities based on ESG risk assessment metrics as the basis for filtering.

Is ESG perfect? Not by a long shot. It's incomplete and ESG ‘materiality’ only addresses the impact of sustainability issues on an enterprise’s financials rather an enterprise’s impact on the world’s sustainability. But the universe of ‘financially material’ sustainability issues is growing because the standards are developed through open, transparent processes. However, there has been way more financial input than sustainability input into that process.

Rather than attacking the term ESG, sustainability professionals need to step up and help improve those standards.

It's not the words that matter, it's the results. So rather than arguing over the words, let’s put our efforts into expanding the use of and requirements for

reliable, relevant, science-based targets and sustainability metrics.