Why move from CSR to ESG?
Traditionally, corporate social responsibility (CSR) has been about doing good for good’s sake. It has focused on social accountability and community engagement, offering qualitative evidence of the positive impact a company can have on the world.
Investors, regulators, industry-leading manufacturers, non-governmental organizations (NGOs), and the public are now pressuring companies for quantifiable evidence of this positive impact. Enter environmental, social, and governance reporting (ESG), which examines the hard numbers and material effects of a company’s activities on the ecosystem, people, and on the business itself. For complex manufacturers, it has become imperative to move from CSR to ESG.
ESG vs CSR
To understand the shift from CSR to ESG, let’s examine the differences between the two concepts.
Corporate social responsibility has its roots in corporate philanthropy. Entrepreneur Andrew Carnegie challenged other wealthy people to support social causes. As the years went by, society compelled businesses, not just individuals, to do more than just make a profit. In 1953, U.S. economist Howard Bowen published Social Responsibilities of a Businessman, in which he advocated for business ethics. As such, CSR has always been a “conscience” behavior for companies.
The concept of ESG also has a long history. Quakers in 17th century England would invest in companies that turned a profit while minimizing harm to society. However, the term ESG did not come into use until 2005. Yet, ESG has always included business objectives while striving to make the world a better place.
Since that time, the terms ESG, CSR, and sustainability have been used interchangeably by companies. ESG has become mainstream, and it is used almost exclusively by those who evaluate a company’s efforts to improve its impact on society, the environment, and its employees (institutional investors and regulators). Companies title external reports on these matters “ESG reporting.”
In contrast, CSR refers to organizational efforts to make the world a better place. Corporate philanthropic work, community involvement, environmental, and employee well-being programs all fall under the CSR umbrella.
Another distinction with ESG vs CSR has to do with accountability, ESG goes beyond CSR to demonstrate positive impact with data.
Why ESG Matters More Than Ever
There are four reasons ESG has gained importance over CSR:
ESG Investing is a Priority
Numerous studies show that investors are focusing on ESG. Research from Gartner points to the growing value of ESG to investors. Eighty-five percent of investors considered ESG when investing in 2020. Morningstar, an investment research firm, noted that 72 ESG-related shareholder resolutions appeared on proxy ballots, and half of them passed with majority support. Moreover, investors are choosing investments that prioritize ESG. A 2021 report from Bloomberg estimates global ESG assets will exceed $53 trillion USD by 2025.
Today, regulations are increasingly addressing the three facets of ESG. The Registration, Evaluation, Authorisation, and Restriction of Chemicals (REACH) Regulation; Restriction of Hazardous Substances (RoHS) Directive; EU Waste Framework Directive; and Toxic Substances Control Act (TSCA) relate to the environment. The UK Modern Slavery Act, Australia Modern Slavery Act, U.S. Tariff Act of 1930, Federal Acquisition Regulation (FAR)/Defense Federal Acquisition Regulation Supplement (DFARS), and many other pieces of legislation limit forced labor and address companies’ social impacts. Sanctions and anti-bribery and anti-corruption such as the Foreign Corrupt Practices Act require businesses to improve their governance.
Industry Leaders Are Putting Pressure on the Market
In addition to investors and regulators, many global brands have put pressure on their suppliers to adopt ESG best practices. The Carbon Disclosure Project, a non-profit devoted to reducing carbon emissions, reported a 24 percent increase in companies asking their suppliers to report on environmental data.
Leading companies recognize the risk that direct and indirect suppliers pose when they do not have ESG programs of their own. They cannot afford the damage to their reputation if their suppliers have poor practices.
ESG Reporting Scrutiny from the Public & NGOs
Some ESG experts would say that NGOs lead the charge when it comes to ESG. They are uniquely positioned to demand greater transparency into ESG efforts from corporations because they have a reputation for being ethical, unbiased, and fervent in their desire for positive societal and environmental change.
When NGOs put continuous pressure on corporations regarding sustainability issues, the public pays attention. Research from PricewaterhouseCoopers in 2021 showed that 80 percent of the public are more likely to buy from a company that has a strong reputation for environmental protection and governance, while another 76 percent said they are more likely to buy from a company with a strong reputation for social issues.
Today’s consumers are more informed than ever before about ESG issues and their impact on the environment and society. Many consumers do not want to be party to environmental damage or human rights issues. When NGOs reveal evidence of poor ESG performance, the public takes notice, and in many cases, action.