Ask J: ESG, Impact, Sustainability: What’s the difference?

Ornamental Kale, Rascafría (Spain)

In this interview, Piet Klop, the head of Responsible Investments at the Dutch pension fund PGGM, highlights that when it comes to responsible investments, it’s important to: “distinguish between ESG risk to the portfolio (outside-in) and impact by the portfolio (inside-out), including investing in solutions to real-world problems”. After reading this interview, it made me think that it could be useful to debunk these 3 terms (ESG, Impact and Sustainability) that we are often tempted to use interchangeably. Without further ado, let’s check it out.

ESG: Environmental Social and Governance

This concept is typically used to reduce negative impact and is associated with the idea “DO NO HARM”.

ESG is a risk framework to identify the types of risks that should be mitigated to reduce the impact on business’performance. This framework assesses the impact on the Environment (carbon emission, waste management, resource conservation), on Social consideration (forced labor, community engagement, diversity and inclusion), and Governance (internal controls, policies, transparencies, and board practices).

Too often, the ESG framework is used in a limitative and self-centered way: the ultimate objective is to curb the non-financial risks for a company by controlling a company’s external impact in order to avoid negative repercussions on that company’s business performance.

Impact

This term is usually associated with the idea of “DOING GOOD”, which goes further than the ESG risk framework. When we say that we pursue “impact”, this is short for “NET POSITIVE IMPACT”, while considering both the positive and negative impacts of business activity, whether direct or indirect.  It’s more focused on creating these net positive outcomes for external beneficiaries and the environment. In essence, there is also an idea of transformation behind it.

Of course, it is important to consider the ESG dimensions when assessing a company’s impact on these beneficiaries, but it’s really about the transformative journey for external beneficiaries. In fact, practitioners talk about the theory of change where one needs to assess the inputs and activities that will contribute to new outcomes for these external stakeholders.

When it comes to impact investing, investors will typically look for transformational projects when selecting their investment targets. Remember, impact investors are looking for impact and positive returns. Yet, it’s not just about a nice impact story. The key is to find ways to demonstrate the achieved impact by measuring and monitoring the impact and testing the validity of the theory of change.

Sustainability

The term sustainability relates to the ability to meet present needs without affecting the ability of future generation to meet their own needs. From a business perspective, it is a vision that underpins its capacity to maintain conditions over the long term on three dimensions: environmental, social and economic.  This implies:

-  avoiding depleting environmental resources (the environmental dimension), reducing the ecological impact of the company

- implementing practices that are mindful of universal human rights and welfare, and that reduce social inequalities (a social dimension)

-  preserving economic health of stakeholders and the company itself.

Conclusion

Embracing sustainability practices therefore requires using the ESG framework, not only to manage the ESG risks to the company but also for the sake of creating a net positive impact on people and planet.

One more thing

Back in 2015, the UN adopted the Sustainable Development Goals (SDGs) and related targets at the heart of their 2030 Agenda towards Sustainable Development, “a blueprint for peace and prosperity for people and the planet”.  The interesting point is that the SDGs now provide a visual guide to the intended impact to look forward to.  It provides a handy guide to narrate the impact story of your initiatives and to align all actors toward the same endgame.

The 17 Sustainable Development Goals