Let's transition from the CSR framework and concept to the ESG framework to steer our sustainable development.
CSR has a local and short-term perspective and has led to inconsistent non-comparable commitments.
ESG has a global, industry-specific, business and supply-chain encompassing, long-term approach.
CSR is often focused on projects outside of the companies operations, lending itself to a higher potential for greenwashing.
ESG provides quantifiable metrics allowing for goal-setting and iterative approaches to generate measurable sustainability impacts.
ESG is more likely to help sustainability committed companies realize benefits and outperform those not engaged.
CSR (Corporate Social Responsibility), introduced in 1953, and ESG (Environmental, Social, and Governance), introduced in 2005, are both frameworks companies can use to guide their core operations and corporate vision towards sustainable development. Both of these concepts are frameworks with subsets of tools such as the Greenhouse Gas protocol (how to calculate emissions) and Science-Based Targets (how to set targets) as well as different disclosure guidelines such as the Nasdaq ESG guidelines, GRI (the Global Reporting Initiative), and the CDP (formerly the Carbon Disclosure Project).
The Harvard Business Review defines CSR as “the aligning of a company’s social and environmental activities with its business purpose and values”. However, when HBR then performed a survey across 142 managers graduating from Harvard’s executive education program, they found that despite this shared ideal of purpose and value, CSR programs varied massively, differing from forms of philanthropy to environmental sustainability, to the pursuit of shared values.
Within these significant variations, while some companies have used CSR to create a holistic and integrated approach to sustainability within their operations, far too many have used CSR as a glossy report shield to place their reputation behind. These differences are a byproduct of poorly coordinated approaches due to the inherent vagueness of CSR. CSR programs are often orchestrated to serve only direct stakeholders through a short-term perspective lens to portray a positive public image.
CSR efforts can too often lead to companies directing their attention into local and small-scale projects outside of their core operations, reducing inter-connectivity within the three pillars of sustainability. This increases the risk of greenwashing by focusing on the appearance of sustainability rather than its actual application.
Due to the fuzziness regarding the idea of “corporate responsibility” and the potential lack of any stewardship on the part of companies, in 2005, the UN Environment Programme on Finance Initiative under the direction of its Secretary-General, invited over 50 CEOs of major financial institutions and jointly published “Who Cares Wins”, a report establishing the ESG concept and detailing its need.
The goal of this report was to establish a more trustworthy, more reliable, and resilient financial institutions and to create awareness and mutual understanding of how companies can and should develop sustainably.
ESG aims to do this by setting CSR within a broader, measurable, industry-specific, and goal-oriented framework to help drive purpose-led business and create measurable impacts towards their ESG objectives. These metrics provided by ESG additionally benefit investors, who can use these metrics to gauge the sustainability performance of companies and can see which companies are committed to sustainability and which are not. ESG integrates sustainability within a company's operations and reporting, where financials are reported alongside sustainability efforts, with some companies even linking executive remuneration and incentives to sustainability metrics.
This holistic, integrated approach is what CSR can, at times suggest, but ESG requires it. The application of this integrated approach helps ESG avoid the pitfalls of CSR, particularly when it comes to greenwashing because it forces companies to look into how it operates in a complex system and how ESG can contribute to sustainable development.
This sustainability and ESG focus additionally goes beyond just reporting. ESG allows companies to implement a measure-implement-assess-iterate approach, allowing for a transparent quantification of environmental and social performance. This will enable companies to create action plans for the long-term sustainable development of the company, creating opportunities for potential cost savings, new income streams, and business models using circular economy principles.
Using sustainability and ESG metrics to guide decision-making, companies can unlock monetary benefits through energy and material efficiency cost-savings and gain access to growing sustainable markets. The Ellen MacArthur Foundation estimates that the circular economy presents a EUR 1.8 trillion business opportunity, just within the EU.
CSR vs. ESG
ESG is the future
These differences are why investors such as Black Rock and S&P Global have already put their money where their mouth is in terms of ESG and Sustainability related investments. This commitment is already paying off for many companies themselves as well, where ESG committed indexes have consistently outperformed their industry counterparts, as can be seen from Forbes and GreenBiz magazines. It is worth noting that there is a reason why seemingly no CSR funds exist, as opposed to the multiple ESG/Sustainable, and even Circular Economy, funds and indices.
The ESG framework has been chosen by industries and is being developed to improve metrics, industry-specificity, and cross-connectivity. ESG exists within a system of continuous improvement, and it still has room to grow through a clear definition of the standards and terminology, the quality of the data being provided, and adoption levels. ESG does, however, even in its current form, provide measurability and robust commitment to sustainability throughout a company’s operations and value-chain where CSR does not.
This is why the EU and we at CIRCULAR believe it is time to trade in the Nokia brick-phone CSR mindset for the smart-phone ESG mentality.
CIRCULAR Solutions is a leading independent Nordic sustainability & ESG consulting and services firm. We provide a unique approach to sustainability based on robust, in-depth, risk management, and scientific best practices across sectors and industries. We help develop strategies, sustainable services and products, impact reporting, and sustainable financial instruments.