ESG & Sustainability 101

What is Sustainability?

There are many definitions but in essence Sustainability is humanity meeting its current needs without overburdening the natural environment or future generations. It’s important to recognise that sustainability is not just about climate.

• Environmental sustainability means maintaining ecological integrity, preserving biodiversity, and maintaining the balance of natural systems, and that natural resources are consumed at a rate less than they can be replenished.
• Social sustainability means that a minimum standard of basic necessities and human rights is afforded to all people, and that communities are healthy and secure.
• Economic sustainability means having economic systems that are accessible to everyone.

Where did it originate from?

The concept of sustainability traces its roots to actions in the 1970s and 1980s. Moreover, in 1987 the Brundtland Commission proclaimed sustainable development to be compatible with economic growth and defined it as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This has become the most widely accepted definition of sustainable development.

The definition was originally focused on the development of poorer countries to attain better living standards. It has since expanded with the advent of Corporate Social Responsibility (CSR) and investor activism.

• Corporations practise sustainability through their sustainability policies and strategies through adhere to ESG.
• Investors and financial institutions practise sustainability through the ESG policies they have relating to their investing and lending activities, sustainable finance product offerings, and commitments aligned with sustainability goals.

ESG, Sustainability and Climate Risk

Sustainability is the broadest category and includes other categories. While it is used by both public and private sector, it is the focus of the public sector. Whereas ESG is typically used by the private sector, and mostly the financial sector and corporations, to measure companies and screen investments. The term ESG was coined in a 2005 report by the UN Global Compact.

We all know what ESG stands for but perhaps more important is ESG criteria which are used as a set of standards to gauge companies on their ESG performance.

• Environmental criteria consider a company’s relationship to climate change or nature e.g. CO2 emissions, water usage, impact on deforestation.
• Social metrics examine how a company treats its employees and manages relationships with suppliers and communities.
• Governance deals with a company’s leadership, including board composition, executive compensation, risk management and internal procedures.

Often ESG information is summarised through specific scores or ratings such as those developed by MSCI and Sustainalytics. These several purposes including screening for inclusion in ESG investment funds and insight into how ESG policies are embedded in lending, underwriting and investment practises.

Climate change issues including Climate risk are broader than just the E in ESG. The impacts of climate change (physical and transitional) affect all organisations, governments and individuals.

• Climate policy falls under sustainable development but government policies are not usually discussed in terms of ESG. As mentioned above, ESG is typically used by corporations and financial institutions.
• A firm’s climate finance and climate risk management sits within ESG.

Sustainable Development Goals (SDGs)

Culminating in the 2030 Agenda, the 17 SDGs are a global call to action. They are a set of goals developed and agreed to by the UN and its member countries to shape global policy and private sector action. They span from eradicating poverty and hunger to promoting gender equality and clean energy. These goals are not just aspirations; they’re a roadmap for collective action. Examples include SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action).

Sustainability as a source of Risk

Sustainability issues were previously seen as supplementary add-ons by companies but are now increasingly being viewed as material sources of corporate risks that can directly or indirectly cause financial impacts and losses. Moreover, there is increased recognition that sustainability issues can affect firms materially in ways beyond reputation risk i.e. moving away from just CSR. Of the types of sustainable risks, climate risk is considered the most material over the short-term and are therefore the subject of a large portion of risk based sustainable analyses as well as the focus of frameworks such as the Sustainability Accounting Standards Board (SASB).

Ghassan Zeidan, Founder & CEO of Paragon Consulting Partners

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Risk Management, Internal Audit and ESG Consulting Firm (paragonconsulting.partners)