Non-financial performance is an ever more important part of business, but that doesn’t mean it is easy to achieve. Attempting to navigate the various terms and acronyms can seem overbearing. There is CSR, ESG, SDGs and all manner of other jargon being used. So, we created this article as a guide to help you navigate these worlds and ensure your business is an attractive prospect for forward-thinking investors.
WHAT DOES CSR MEAN?
Corporate Social Responsibility (CSR) refers to the business policy of making positive contributions to social causes. These could include the environment, the community, the wider economy, the health and wellbeing of staff or any other similar topic.
According to the United Nations Industrial Development Organisation (UNIDO):
“CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line-Approach”), while at the same time addressing the expectations of shareholders and stakeholders.”
UNIDO also draws a distinction between CSR and philanthropy or charity work by noting that the latter are external to the workings of the organisation, whilst CSR is more of a strategic business priority.
THE EVOLUTION OF CORPORATE SOCIAL RESPONSIBILITY
In the past, critics levelled accusations that CSR policies were performative or were more of a public relations exercise than a genuine attempt to do good. The implication was that organisations only cared about these non-business topics for as long as they served to bring in new business. Others also dismiss the need for corporations to be shown to be ‘doing good’ at all. A 1970 quote by US economist Milton Friedman showed his disdain for the concept of CSR:
“There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception and fraud.”
However, since the “greed is good” ethos of the 1980s dissipated, CSR has become a necessity, rather than a novel concept. In recent years, the emergence of millennials into the workplace, followed by Generation Z, has meant that any company deemed to be inauthentic in its CSR efforts is likely to be called out on it. A 2016 survey found that millennials were so interested in CSR that 75% of them would take a pay cut to work for a business that was truly socially responsible, whilst 68% would turn down a job offer from a company without strong CSR principles.
In addition, customer sentiment to sustainability is making investors more attuned to the CSR aspects of issuers’ offerings. At the same time, investors also understand that strong social consciousness tends to create a corporate culture that makes the business less open to negative behaviours, such as fraud and corruption.
WHAT DOES ESG MEAN?
ESG stands for Environmental, Social and Corporate Governance. These three broad areas can provide a range of targets for a business to meet in order to improve its sustainability and lower its risk level across various factors. They include aspects like inclusion and diversity, climate change, human rights and more.
This is attractive to the increasing number of socially responsible investors who, in the words of the Corporate Finance Institute, “consider it important to incorporate their values and concerns (such as environmental concerns) into their selection of investments instead of simply considering the potential profitability and/or risk presented by an investment opportunity.”
The popularity of businesses with strong ESG policies has risen swiftly in recent years, with 2018 seeing US$12 trillion worth of funds being invested using ESG-related strategies.
In some regions, such as the European Union, there are already ESG compliance regulations in place. Meanwhile, a number of other countries, such as the US, are currently consulting on introducing reporting requirements to benchmark non-financial performance metrics.
WHAT ARE THE KEY DIFFERENCES BETWEEN ESG AND CSR?
CSR is often seen as the predecessor of ESG, leading the way in making businesses more socially responsible and making them think about their impact on society, employees, shareholders and other stakeholders.
However, the two concepts are also different in a number of ways. Here are the key differences between the two.
CSR is a broad collection of sustainable activities aimed at making businesses accountable
ESG features specific sustainable policies where the success or otherwise is measurable for the business using ESG ratings
Conducting CSR activities is the end goal
ESG policies are led by criteria and the goal is to grow and improve based on those criteria
CSR policies tell a story about the organisation that it can effectively write itself
ESG provides data that can be analysed, showing the true picture of the company’s sustainability, and then acted upon
CSR relates to the intentions of the organisation
ESG is about meeting those intentions
One of the main reasons for the evolution from CSR to ESG is the rise of technology. This allows businesses to seek a benchmark to track their performance in this important aspect. It allows them to prove their progress and compare themselves with peers, allowing investors a clear view of the organisation’s ESG performance thanks to the amount of granular reporting data it is possible to collect and analyse.
For example, at BoardClic, we use historical data from a range of different sustainability factors to create our ESG Index, which acts as an external benchmark for your business.
WHAT IS BEHIND THE ABBREVIATION SDG?
SDGs are Sustainable Development Goals. Originally introduced by the UN, these concepts used to be the remit of governments. In a more connected world, however, everyone can play their part, including businesses.
The UN has defined 17 SDGs that it believes will provide a better future for the world’s population and which it wants to achieve by 2030. These include:
Clean Water and Sanitation
Affordable and Clean Energy
Sustainable Cities and Communities
Responsible Consumption and Production
For businesses, these United Nations sustainable development goals provide a handy guide for what to bear in mind when implementing policies. Each of the 193 governments that agreed to deliver them has its own priorities, which will affect organisations when it comes to working out how they can help and what legislation may be introduced in the future by the nations committed to achieving these goals.
ESG, CSR AND SDGS
For companies with a strong CSR ethos, there seems to be a direct line between all three of these aspects of sustainability. The story you create through CSR is quantified by ESG, where you learn how you can make a real impact on your level of social responsibility and uncover the benchmark from which you strategise to improve. By aligning ESG with the areas highlighted by the UN, you also help your business make its contribution to the SDGs.
You must also remember to meet all of the ESG requirements laid down by the government if you work in areas with current or forthcoming regulations. This includes the European Union, which has the Sustainable Finance Disclosure Regulation (SFDR) and the Non-Financial Reporting Directive (NFRD). If you work across multiple countries, you should be aware of the legislation in each territory. Once you are certain of the compliance requirements, you can also add measures to improve your performance towards achieving SDGs.
METHODS OF QUANTIFYING IMPACT
Around 40% of the world’s biggest companies currently use SDGs as part of their reporting processes. However, quantifying the SDG impact of a business and its decisions is not always easy.
Instead, most companies focus on quantifying their ESG performance. KPMG provides a number of suggestions for monitoring performance to ensure a company is making real progress. These include:
Taking a balanced approach to reporting ESG performance, including both positive and negative impacts
Prioritising the right ESG goals for your company
Disclosing how you prioritise them
Disclosing the KPIs you use to measure them
In terms of assessing progress against KPIs, you currently have some choice as to which ESG metrics to use. Besides the mandatory reporting in some jurisdictions, you can also choose to adhere to a specific ESG reporting framework or a benchmark such as the BoardClic ESG Index.
Using the BoardClic ESG Index allows you to plot your progress in terms of your sustainable impact against your own performance and that of your competitors.
What’s the difference between sustainability and corporate social responsibility?
CSR tends to be concerned with assessment of performance, whereas sustainability looks forward and comprises a strategy to achieve its aims in the future. In addition, CSR is part of the company’s public image in many ways, whilst sustainability is more about its drive to change the company holistically to prepare it for challenges.
What is ESG ranking?
An ESG ranking shows an organisation’s resilience to the risks involved with the environment, social pressures and matters relating to better corporate governance. The rankings take into account reporting data and create a benchmark for companies to measure their progress and sustainable growth against.
Why is ESG important to companies?
ESG is important to companies because it reflects the concerns that consumers, employees and investors care deeply about. It is no longer acceptable to be perceived as a company that is solely focused on making as much profit as possible without considering the environment, people and other parties. An essential part of good governance is the ability to grow the business in a sustainable manner that creates a positive impact on the world. This helps with staff morale, brand loyalty and it aids asset managers in making more sustainable investment decisions.
Although CSR, ESG and SDGs are similar in many ways, they also bring unique challenges and opportunities for businesses. Building a sustainable company is not an easy task, but by taking your cues from the aims of the UN sustainable development goals and the rich ESG data available, you can plan a long-term route through compliance to the benefit of the business, the investors and the world.
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