ESG and sustainability: what do investors need to know about how they differ?

The term “ESG” stands for Environmental, Social and Governance, three key pillars for measuring the wider impact of a business. Environmental considerations include how a company’s practices impact on the natural world, affecting issues like climate change and biodiversity loss. Social factors centre on impacts on people — whether that be employees, customers or society at large. Governance focuses on the responsible management of business operations, ranging from tax affairs to board diversity to dealing with minority shareholders. 

The term “sustainability” is closely related to these three factors but has a broader, more holistic meaning tied to the long-term health of the planet and society. At the root of sustainability is the challenge of considering present needs without compromising the ability of future generations to meet their own needs. Therefore, this approach should be integrated into best business practices with the goal of reducing adverse environmental and social impacts. 

While the two terms overlap significantly, we believe it is important to clearly distinguish between them. ESG can be seen as a tool to measure how companies perform in relation to specific criteria and may help demonstrate a company's commitment to sustainability.  Typically, a company is given an ESG score or rating, which can highlight or quantify their exposure to E, S and G risks. While a rating can be a highly effective guide for estimating a company’s sustainability path, it does not necessarily convey the whole story of a company’s commitment to sustainability, and other deeper sustainability-related issues, such as culture, mindset or risk-appetite need to be taken into account too.  

ESG: a tool for measuring a company’s exposures and progress regarding specific environmental, social and governance dimensions.  

Sustainability: a broad framework encompassing responsible business practices that aim to reduce adverse environmental, social and governance-related impacts, fostering long-term viability. 

Why is ESG so vital?

Building towards a more sustainable, more equitable world is not a simple task. But having some carefully defined criteria for judging progress enables us to consider how companies are performing across a range of areas. 

Investors often use ESG indicators to assess factors that may have a direct impact on a business’s financial performance. For example, they can evaluate risks in areas such as carbon emissions, working conditions, diversity and inclusion, and executive pay. ESG investing holds that investors should consider not only financial gains, but also the impact of their decisions on the natural world and on society as these ultimately feed into their long-term bottom line. 

Why is Sustainability so vital?

Sustainability in business “encompasses the long-term viability of a company’s operations, taking into account its environmental, social, and economic impacts”, says the Corporate Governance Institute. Success means not only strong economic returns but also contributing positively to society and reducing your business’s environmental footprint. 

A business that puts sustainability at the heart of its decision-making is likely to fare well on many ESG criteria, and, at the same time, be better prepared for the future. These businesses may take care to become less exposed to physical and transition risks from sustainability-related issues, while at the same time enjoying the benefits of positive feedback loops created by their embracing sustainable business practices. While over the long term the benefits of sustainability will likely outweigh this, it is important to recognize that transitioning business models could have a negative impact on financial performance over the short term, due to the higher need for investments, among other factors.

Watch Markus Müller, our Chief Investment Officer for ESG, and Karen Sack, Executive Director of our partner Ocean Risk and Resilience Action Alliance (ORRAA), explore the difference between ESG and Sustainability — and where regeneration comes into the picture. 

Facts about ESG 

• Global ESG assets under management are on track to surpass $40 trillion by 2030, up from $30 trillion in 2022. [1]
• To bend the carbon curve and achieve net-zero, Institutional Investors Group on Climate Change (IIGCC) estimates that US$97 trillion is required between now and 2050, and sustainable investments need to grow from c. US$2 trillion pa today to US$3.5-3.7 trilllion pa, with the  majority in energy (35%), mobility (31%) and buildings (19%). [2]
• Only 15 percent of investors think they have good knowledge of ESG and just three percent identify as ESG experts, according to Deutsche Bank’s ESG survey 2023. [3]
• ESG data, ratings, criteria and frameworks continue to evolve, driven by regulation as well as improved data availability. However, a standardised approach to evaluating ESG performance and disclosing ESG risks against specific metrics is still lacking. Some leading examples of current frameworks include: Corporate Sustainability Reporting Directive / European Sustainability Reporting Standards, The Global Reporting Initiative (GRI), The Sustainability Accounting Standards Board (SASB), and The Task Force on Climate-related Financial Disclosures (TCFD). 

Facts about Sustainability

• The World Economic Forum’s New Nature Economy Report projects that by 2030, fully embracing nature-positive transitions across three key socio-economic systems could unlock USD 10.1 trillion in business opportunities, with China poised to capture 20 percent of this potential. [4]
• More than half of consumers (54 percent) are willing to pay more for sustainable products and services, according to a 2024 survey by global consulting firm Simon-Kucher. This marks an increase of 22 percentage points in one year. [5]
• 96 percent of the world’s biggest 250 companies report on sustainability or ESG matters. But fewer than half have leadership level representation for sustainability. [6]