Is ESG better than CSR?

Environmental, social, and governance (ESG) is a framework used to evaluate how well an enterprise performs in relation to sustainability standards and ethical concerns. Corporate social responsibility (CSR) refers to a concept in management where companies assess various social and environmental issues within their business operations which impact society. 

ESG is currently a hot topic among businesses, investors, and stakeholders. Due to the significant risks relating to the climate crisis, businesses have realised the importance of being sustainable and how it affects them in the long-run. ESG investing focuses on how we can make a responsible investment in the private sector, and that entails companies employing business ethics that take into account environmental risks and their societal impact as drivers of their financial performance.

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Origins

The term corporate social responsibility may have first appeared during the Industrial Revolution in the 1760s, but it really took off in the early 1950s. ESG originally appeared in a 2004 UN study titled "Who Cares Wins," however the practice of ESG investment dates back to the 1960s when it was known as ‘socially responsible investing’. Building social justice into the fabric of company operations is becoming increasingly important to create new definitions of value for a wider pool of stakeholders, not just shareholders. 

However, one can wonder: Is ESG better than CSR? Do they both represent distinct ideas? Or, how can ESG support CSR initiatives? 

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What is CSR? 

According to the United Nations Industrial Development Organisation (UNIDO), CSR is defined as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives. 

CSR attempts to motivate companies to integrate environmental and social issues into their business operations and enhance stakeholder relations. Companies hope to improve their brand image in the eyes of potential investors and customers through CSR initiatives. The four categories of environmental, philanthropic, ethical, and economic concentrate on various facets of corporate sustainability and are used to categorise CSR projects for this reason.  

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What is ESG?

ESG assesses an organisation's performance in regard to several ethical and sustainable concerns, as well as its economic operations. Additionally, ESG analytics tools evaluate risks and performance, and provide a way to measure ESG criteria. In order for investors to assess how sustainable their investments are, the fundamental goal of ESG is to figure out how sustainable a company is based on a company’s sustainability initiatives that can be measured through assigning ESG ratings to different aspects of its business operations. ESG thus offers a mechanism to quantify business risks and opportunities in order to demonstrate the company's advancement towards sustainability.  

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Positives and Negatives of ESG of CSR 

Companies can show their commitment to sustainability and gauge their social effect in two different ways: through ESG and CSR. So, what are the pros and cons of each?

CSR - The Positive

By promoting initiatives that can benefit society and the local community, such as educational outreach for children or changing labour practices and environmental policies, CSR helps businesses fulfil their corporate and social duties. Through CSR initiatives, it creates a favourable brand image for the business, attracting fresh talent and retaining clients and staff. 

CSR - The Negative

CSR holds that businesses should examine how their actions may affect the environment and society. It takes a less pragmatic stance and a more idealistic approach to sustainability. CSR lacks a global perspective on corporate practices and has a limited vision that only considers a company's image and how its activities would be perceived by future employees, consumers, and suppliers. 

Also, companies may choose to place less focus on CSR since it is not required of them. Companies may overstate their claims about CSR initiatives in order to acquire awareness. As such, CSR activities cannot be ‘measured’.  

ESG - The Positive

By offering a quantifiable measure of sustainability through ESG ratings and reports, ESG assists firms in identifying areas where their sustainability efforts are either lacking or working. Monitoring a company's sustainability initiatives, employee treatment, and open governance rules through ESG reporting enables businesses, investors, and stakeholders to make informed investment decisions. 

ESG is on the way to being underpinned by strong regulation. Regardless of whether a company is an SME or a large enterprise, the new ESG mandatory reporting and disclosure regulation will assist them in disclosing their sustainability reports. In order to achieve their ESG objectives, this will assist in providing stakeholders with comparative and targeted ESG data across businesses and industry sectors.       

ESG - The Negative

Companies operating under the ‘cover’ of ESG have been exposed for misleading consumers about their product’s environmental impact. For instance, Delta Airlines has been fined with a lawsuit of USD 1 billion for misleading consumers about its carbon neutrality promises. Similarly, Lufthansa’s Green Fares is also an attempt to greenwash its customers by making them pay extra to apparently compensate for the flight’s carbon emissions. If one is unaware of the dishonest means by which businesses present environmental claims, greenwashing can be challenging to identify. 

The variability of ESG indexes and ratings, which makes it challenging for customers, institutional investors and stakeholders to evaluate them across businesses and industry norms, is another significant issue with ESG. For example, in an effort to stop greenwashing, MSCI, one of the primary providers of ESG ratings, plans to remove ESG ratings from the majority of funds.

Many genuinely ESG-focused organisations, however, will lose their ESG ratings as a result of this change and will see their ESG ranking drop, which is essential to a company's reputation and general performance. Setting long-term sustainability goals for businesses and investors might be difficult in light of the new laws and regulations pertaining to ESG issues.  

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ESG Factors

When determining and studying a company's overall sustainability efforts, ESG has emerged as a more practical and effective way to measure environmental, social, and governance  aspects when compared to CSR. ESG focuses on measuring a company's overall sustainability efforts through reports and ratings and helps investors form a clear idea of how sustainable a company is when compared to others and stay informed on areas where they lack, while CSR helps businesses adopt sustainability both internally and externally by allocating resources to social causes, environmental sustainability, and ethical practices. 

ESG reporting provides factual data that can be measured and tracked across industry standards for sustainability benchmarks, which can be verified for accuracy by investors and stakeholders. CSR strategies concentrate on a company's action towards benefiting society, which may or may not be accurate as it cannot be measured.

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Takeaway

Even though CSR has been around for decades, the impact of CSR has not been as substantial when compared to the increasingly widespread adoption of ESG. CSR has been, in many ways, the voluntary ‘run up’ to what is a more regulated ESG. 

ESG has provided a practical framework for companies to be more accountable for their sustainability claims, and most importantly has helped organizations to place sustainability concerns at the centre of their operations and drive the innovation needed to meet the growing challenges of climate change. As such, many investors and stakeholders are better able to assess how sustainable a company really is, and, more importantly, whether it is in line with their ethical values and long-term sustainability goals when making investment choices.

Thanks to ESG reporting laws now coming into effect in the EU, which will likely be emulated or built upon throughout other regions, companies will be compelled to disclose material information about their climate exposure, risk management strategy, corporate governance, and greenhouse gas emissions. 

It’s not a question of being ‘better’, rather that ESG is the more comprehensive successor to CSR that lets us put sustainability in front.       

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