Conscious investing and the impact of corporations on society have been hot topics of late among news outlets. Typically, regarding investment trends and opportunities, how to make the most money is front and centre of the discussion. But a philosophical and political shift occurred when the acronyms ESG and CSR were thrown into these discussions. So, in this article, we will explore what ESG and CSR are, what differences separate them, and why they are creating waves.
What do ESG and CSR mean?
As with any discussion, it’s essential to begin by knowing what we are discussing. For example, CSR refers to corporate social responsibility, while ESG relates to the environment and social governance.
ESG refers to criteria used to judge (or rate) any organisation’s impact on environmental, social, and governance factors. ESG criteria are used by investors and companies to increase the focus of an organization on ethical and sustainable practices.
In simple terms, CSR refers to what an organisation does internally that addresses social, economic, and environmental well-being. It is a business model that helps a company be socially accountable to itself, its stakeholders, and the public. CSR refers to strategies that companies put into action as part of corporate governance that are designed to ensure the company’s positive impact on society and the environment.
How does ESG work?
The main controversy, real or perceived, surrounding ESG is that the criteria for how an organisation is judged on the three factors (environmental, social, and governance) are neither uniform nor regulated. As a result, many investment firms have started giving companies scores or rankings based on how they ‘perform’ against ESG criteria. With these scores, investment firms argue that people can invest their money in companies that better align with their values.
But for many larger firms that oversee many investors, like pension funds, ESG has met some opposition. Many investors in this category have argued that they want their pension funds to perform to the best of their financial capabilities and not have opportunities to invest “hamstrung” by ESG criteria.
Again, because the criteria for ESG scores are not set and vary between organisations, some stakeholders argue that it is hindering their financial outlook.
How does CSR work?
Corporate social responsibility (CSR) refers to a company’s or organisation’s values, policies, and procedures and how they impact the global social, economic, and environmental situation. Ideally it is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public.
Unlike ESG, there is no score or ranking attached to a company or organisation by investment firms when it comes to investing. Instead, a CSR-style statement or a CSR report may be linked to that organisation or company.
Statements on CSR consider several factors, including:
- leadership structure,
- supply chain sources and their impact on local communities,
- employee compensation and job satisfaction,
- shareholder interests,
- environmental impacts,
- ethical responsibility,
- philanthropic endeavours,
- financial responsibilities
The difference between ESG and CSR
CSR doesn’t just impact investors; business partners and employees too may be interested in a company’s CSR statement. CSR is an internal initiative to fulfil a corporate purpose and is a business model used by individual companies. CSR is often voluntary.
ESG, as a ranking system for investments, while not uniform or regulated (yet), is more related to investors and investment firms. It is a set of standards that investors use to evaluate companies. ESG reflects a company’s external impact on society and the environment.
Both CSR and ESG share common ground in promoting sustainable and responsible business practices that consider social, environmental, and governance factors. However, they have slight differences: –
CSR focuses primarily on activities companies undertake to increase their positive global impact. Developing a CSR model enables businesses to disclose their efforts to themselves, stakeholders, employees, and the public. CSR activities are frequently voluntary and motivated by a company’s values and commitment to ethical business practises.
ESG takes a more comprehensive and broader approach to evaluating the performance and sustainability of a company by evaluating three pillars: environmental, social, and governance. All three components constitute a framework for assessing the long-term sustainability performance of a company.
Why does this matter?
Companies value ESG and CSR. First, they help companies be socially responsible and sustainable, which increases brand value. Second, they can attract as well as retain customers, employees, and investors. Thirdly, they can assist companies decrease social and environmental hazards and expenses like lawsuits, fines, and reputational damage. Fourthly, they can assist companies find new markets that match their values and goals. Finally, ESG and CSR may help companies meet regulatory standards and demonstrate their commitment to stakeholders and society at large.