ESG has increasingly become a priority for investors, employees and stakeholders. Yet it’s a concept that is not always well understood and is often plagued by common misconceptions. Our ESG primer is designed to help you gain a baseline understanding of what ESG is, including how ESG differs from corporate philanthropy and corporate responsibility, and a breakdown of ESG factors and their potential value for middle market companies.
While the concept of ESG is relatively new — having first been coined in 2004 — the idea that organizations should be concerned with more than profits has long been a theme. Philanthropists like John D. Rockefeller and Andrew Carnegie laid the foundation for corporations sharing the wealth more than a century ago.
As social expectations towards corporate behavior have evolved, organizations have increasingly taken ownership of their impact on society and aligned their philanthropic efforts with their business objectives. We’ve seen the use of many different (and overlapping) terms to describe these broad activities that support the dual mandate of doing well while doing good, perhaps the most common being Corporate Social Responsibility (commonly referred to as CSR).
Commonly considered the predecessor to ESG, and as a general rule of thumb, CSR is focused on making organizations socially accountable, while ESG makes their efforts cohesive and measurable.
In today’s business climate, demand for corporate accountability and transparency has become a key consideration for investors, employees, customers and other stakeholders. As a result, the ESG framework has gone mainstream and is now a commonly used assessment marker to evaluate the health and sustainability of an organization.
Decoding the terminology
Philanthropy, CSR and ESG are related, but not the same. There is still some common confusion around these approaches. Here are a few key differences:
|Corporate Philanthropy||Corporate Social Responsibility (CSR)||Environmental, Social and Governance (ESG)|
|What is it?||Donating to good causes.||Making a positive impact on the world.||The application of criteria that creates long-term value for people, planet and business.|
|Examples||Charitable contributions Scholarships Volunteering||Charitable giving and community investments Volunteering Sustainability initiatives Ethical labor practices||Reducing carbon footprint Climate resilience Diversity, equity, inclusion and belonging Ethical supply chain Corporate activism Employee health and safety|
|How is it best described?||Giving back without expectation of return.||Doing good in addition to doing well.||Doing well by doing good.|
|Who primarily drives it?||External communities||Shareholders||Stakeholders|
|Measurement and reporting||Incorporated in an annual report or impact report.||No universal measurement criteria. Incorporated in an annual report or impact report.||Multiple disclosure frameworks with specific measurement criteria. |
Often reported in an impact or ESG report, with many beginning to incorporate metrics in financial statements.
|Strategic alignment||Separate from core business.||A strategic initiative – often tied to organization branding and culture.||Integrated in core business strategy.|
|Internal responsibility|| |
Breaking down ESG
At its core, ESG represents a set of non-financial factors that are used to evaluate organizations. These criteria may vary by industry, entity type, geography, as well as by an organization’s unique goals and priorities. As you might expect, ESG breaks down into three core criteria: Environmental, Social and Governance.
Below, we take a closer look at each of these pillars, what each area could look like in practice, as well as the potential opportunities to build value.
|Definition||How an organization’s activities impact their local and global environments, and how those environments impact an organization’s operations and communities.||The quality of a company’s relationships with its employees, customers, suppliers and communities.||Policies and practices that guide an organization’s leadership.|
|In-action examples||Programs to quantify and reduce greenhouse gas emissions, water consumption, energy use and waste production.||Programs focused on supporting citizenship efforts; diversity, equity, inclusion and belonging (DEIB) initiatives; and supplier ethics.||Clear communications, transparency, accountability and regular review of policies to align with values.|
|Social value||Lessening your environmental impact and setting expectations for partners in your value chain.||Strengthening ties to the communities where your people live and work||Aligning policies and actions with core values.|
|Business Value|| |
Why ESG matters
While there is currently no mandated framework for ESG in the U.S. yet, embedding ESG considerations into your organization — across your culture, your processes and your overall business model — offers a long list of benefits for both your bottom line and the communities you serve.