Sustainability Or ESG? Identify Companies That Understand The Difference

When it comes to sustainability and ESG, it’s not potato/potahto. There is a difference, and the difference matters.

The term ESG has been used to distinguish investment funds that, in theory, screen companies for some level of sustainability performance or advantage. But applying an ESG categorization doesn’t guide behaviour or connect to outcomes. It is an acronym, with topics that a company can choose to address.

An ESG approach can lead to compartmentalizing issues, resulting in environmental, social or governance silos. This is problematic because most issues don’t fit into neat boxes. For example, climate change impacts not only the physical environment but also human rights, including the rights to life, food, water, housing, health and work.

In contrast to ESG, sustainability makes room for a systems approach to understanding and addressing topics that overlap and intersect.

Moving beyond ESG and embracing complexity

The view that ESG is not only good for the planet and people but also good for business has gained momentum in the past five years, and really took off after Larry Fink’s 2018 letter to CEOs declaring,

To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.

While investors and heads of corporations are showing interest in ESG, activity is limited to what’s required, focusing on compliance and efficiency, and relegating innovation to a moonshot.

Companies that move beyond checking boxes aspire to fundamentally transform their businesses — to seize an opportunity. Rather than continuing to think about sustainability commitments as obligations or contributions to society — something necessary but on the periphery of the business — leading companies treat those commitments as a competitive advantage.

Unilever and IKEA have both moved their sustainability efforts far beyond what’s required, to boldly integrate sustainability (not ESG) into the heart of how they do business, and all the while disrupting the status quo.

For example, Unilever’s sustainable living plan outlines the company’s requirements for sourcing, supply chain and production. The plan includes guidelines on water and energy use, worker rights and pushing for a “circular economy” for plastic packaging.

Rigorous metrics are required to measure progress and performance on sustainability goals. However, to inspire and galvanize action, these metrics need to be pulled into a compelling narrative and emotional engagement across the organization with stakeholders. The overall approach needs to come from a place of conviction, distinctive for the brand, meaningful to stakeholders, motivating to employees, resonant in the marketplace, aligned with the business’s purpose and consistent with its values.

A company must start with purpose.

Crafting a clear and compelling purpose is essential to creating a strategy that moves the dial from compliance and efficiency, and in time lands on innovation. Purpose answers the questions:

• Why do employees come to work each morning?
• If the company disappeared tomorrow, what would the world lose?

Defining the company’s purpose isn’t a writing exercise built around peer comparison. It’s an exercise in exploration — unearthing the company’s unique strengths and taking an in-depth and wide-angle view of what the world needs from the company.

After purpose is articulated, it should be brought to life across the organization, motivating stakeholders, driving strategy and elevating the brand.

Purpose becomes a critical filter for developing a sustainability strategy that is authentic: focused, credible, distinctive and inspiring.

While a robust sustainability strategy should cover a variety of topics, it’s important that the company identify one or two areas where it can have a significant impact. Purpose lends itself to zeroing in on a set of relevant issues that the company is uniquely positioned to address. What one thing does the company want to be known for or in what area does it want to influence industry or society?

Finally, a company needs a compelling and distinctive sustainability story — a strategic narrative from which all sustainability communications flow.

The story connects stakeholders emotionally, and should be told with strong vision and commitment rooted in tangible actions.

However, beware of a self-congratulatory story about the company’s incremental progress on metrics. Substance is the most important element: a company’s sustainability story should be supported by tangible actions and transparent progress.