From ESG to Sustainability

As a board director, you’re probably familiar with the principles of ESG (Environmental, Social, and Governance). ESG has become increasingly important in the world, and at home, as organizations strive to align their values and practices with those of their stakeholders. Over the last while, ESG has evolved into the longer view of sustainability. It's important to understand what this evolution means for your company or non-profit.

“Sustainability” means meeting the needs of the present without compromising the ability of future generations to meet their own needs. – United Nations definition

While the UN definition is broadly accepted, it’s interpreted in various ways based on context and specific goals. Some interpretations emphasize sustainability’s environmental aspects, while others focus on economic or social dimensions.

How sustainability is defined doesn’t necessarily change when viewed through a board director’s lens, but the board may be focused more on their organization's unique long-term opportunities and its ability to create sustainable value over time.

The Savvy Director is written for a diverse group of directors serving on all kinds of boards. Much of what’s out there about ESG and regulatory frameworks is most easily applied to large corporate boards. But, like the principles of good governance, there’s always a way to bring the story home, even if you serve on the board of a hospital, government agency, non-profit, or charity.

Maybe it’s appropriate for small and medium-sized organizations (SMEs) to stay focused on the original fundamentals of ESG. But I’m curious about how the evolution from ESG to sustainability could apply to the SME boards that many Savvy Director readers serve on.

Over the past few years, the ESG movement has become politicized and monetized. It’s been debated by financial experts, criticized for causing ‘greenwashing,’ and pronounced ‘dead’ in the media. But that’s not what this Savvy Director article is about. Instead, I want to explore what the transition from ESG to sustainability implies for you and the board you’re serving on.

For smaller non-profits, it’s about choosing a few actions that are practical for the work that you do. If that’s the case, our previous blog, ESG for SMEs, serves as a refresher covering ESG fundamentals that are still relevant today

For larger corporate entities, a variety of sustainability frameworks are currently being developed and discussed by global standards organizations and regulators. Your board might be wrestling with the kind of reporting requirements that smaller non-profits are grateful not to have to deal with (at least for now.)

That said, we can all surely find a nugget or two of value within a sustainability framework to help us play our part in building a sustainable future for everyone.

The Evolution from ESG to Sustainability

ESG has been around for some time. If you’re interested in its origins and history, check out our blog, The ABCs of ESG.

ESG focuses on evaluating an organization’s impact on the environment and on society, as well as its governance practices. It’s used to assess a company's performance in these three areas and to identify opportunities for improvement.

Sustainability, on the other hand, focuses on a company's ability to operate in a way that is sustainable over the long term — including not only environmental and social factors, but also economic performance.

Is That a Good Thing?

There are numerous benefits to adopting a sustainability framework. Not only does sustainability take a long-term view of an organization’s operations, it encourages companies to consider the impact of their decisions beyond the boardroom.

In embracing sustainability, organizations can create value for shareholders, employees, customers, other stakeholders, and society as a whole. Sustainability can also help companies manage risk, as it encourages them to consider the potential impact of external factors such as climate change and social unrest.

Of course, there are also potential drawbacks in making the transition from ESG to sustainability. For one thing, sustainability is a broader concept, making it more difficult to define and measure. For another, stakeholders tend to be skeptical of companies that claim to be ‘sustainable.’ That’s where the future evolution and standardization of reporting requirements can add value to the discussion.

What Directors Need to Know

As a board director, it's important to understand the current state of ESG and its evolution to sustainability. You should be aware of key considerations such as how sustainability might impact your organization’s business strategy and decision-making.

You may want to consider the potential impact of climate on your business and how that risk could be mitigated. You should also be aware of the potential benefits of adopting a sustainability framework, such as increased stakeholder engagement and improved financial performance.

To help illustrate how ESG has evolved into sustainability with longer-term goals and metrics for financial performance, the table below compares typical oversight ESG questions with future-oriented sustainability questions that could be asked today in the context of a fictional non-profit organization that focuses on environmental conservation. 

As you can see, ESG oversight questions often focus on short-term goals and metrics such as waste reduction and diversity targets, whereas sustainability questions focus on longer-term goals and metrics that will impact financial performance in the future, such as carbon neutrality and sustainable funding models. By asking sustainability-type questions, directors can help organizations of any size become more sustainable and financially successful over the long term.

A Long-Term Perspective

Board directors who embrace their foresight role in helping to see around corners are finding sustainability questions like the following to be good value when linking to financial performance.

 The Importance of Stakeholder Engagement

Stakeholder engagement refers to the process of involving individuals, groups, or organizations that are affected by or can affect a company’s operations. This includes employees, customers, investors, suppliers, communities, regulators, and non-governmental organizations (NGOs).

Stakeholder engagement is a critical component of sustainability as it involves actively involving key stakeholders in the decision-making process to ensure that their interests and concerns are addressed. It’s important to sustainability for these reasons:

1. Building Trust and Transparency: By openly communicating and involving stakeholders in sustainability initiatives, companies can foster a sense of shared purpose and accountability.
2. Identifying Risks and Opportunities: Stakeholders can provide valuable insights into potential risks and opportunities related to sustainability. Their feedback can help companies anticipate and address issues before they escalate.
3. Enhancing Reputation and Brand Value: Companies that actively engage with their stakeholders on sustainability issues often enjoy a better reputation and stronger brand loyalty. This can lead to increased customer satisfaction and investor confidence.
4. Driving Innovation: Stakeholder engagement can spur innovation by bringing diverse perspectives and ideas to the table. Collaborative efforts can lead to the development of new products, services, and business models that are more sustainable.
5. Ensuring Long-term Success: By considering the needs and expectations of stakeholders, companies can create more resilient and adaptable strategies that support long-term success and sustainability.

More and more, the boards that I serve on are paying greater attention to the stakeholders in their ecosystem and how they’re impacted by the work of the organization. It just makes good business sense. The board has every right to insist on having effective ‘listening posts’ to gather unfiltered stakeholder input when making its decisions.

For example, let’s look at the film production industry. One thing we know is that the public doesn’t think it’s a good idea for the big trucks and huge semi-trailers used on a film location to sit idling six hours+ each day with their diesel engines running to generate power.

As a board member of a film production company, a director might ask, “What are the alternative energy sources to reduce our carbon footprint?” or “How might the catering function reduce its environmental impact?”

These are just small examples, but they add up.

In Summary

For large corporations, the evolution from ESG to sustainability represents a significant shift in how they approach their environmental, social, and governance responsibilities. Even for smaller organizations, the evolution reflects a transition to a broader and more integrated perspective that emphasizes long-term value creation, stakeholder engagement, and a proactive approach to ESG challenges.

For directors on all types of boards, understanding the shift is crucial. It involves recognizing the interconnectedness of sustainability factors and embedding sustainability principles (environmental, social, and economic) into the organization’s business strategy and operations.

By asking the right questions and engaging key stakeholders, directors can ensure their companies not only comply with regulatory requirements but also seize opportunities for innovation and growth.

Ultimately, the ESG evolution towards sustainability offers advantages such as a holistic approach to risk management and long-term value creation. But it also presents challenges, such as complex measurement and reporting requirements. By navigating these challenges thoughtfully and strategically, board directors can lead their organizations towards a sustainable future.

Your takeaways:

• The UN definition of sustainability — “meeting the needs of the present without compromising the ability of future generations to meet their own needs” — is relevant to boards of organizations of all sizes and types.
• The fundamentals of ESG continue to provide a roadmap for SMEs to contribute to the movement.
• While ESG is an important framework for assessing and improving corporate performance, sustainability takes a longer-term view and encourages organizations to operate in a future-oriented way that’s sustainable over time.
• By asking questions that are rooted in sustainability principles — environmental, social, and economic — directors can encourage their boards to embrace sustainability as a tool for long-term success.
• Stakeholder engagement is a critical component of sustainability, as it enables organizations to understand and respond to their stakeholders’ needs and expectations.
• Sustainability reporting frameworks for large companies are being streamlined by global standards organizations and regulators to help identify ESG opportunities for smaller organizations.

Resources:

• ESG By Another Name. © 2024 Korn Ferry.
• Top Sustainability Frameworks: A Comprehensive Comparison. Dean Emerick. ESG|The Report. October 2024.
• ESG: Rebranding or Fundamental Shift? Lauren Hulme and Keira McKee. Torys LLP. April 2024.
• ESG is ‘Dead’, Long Live ESG. Andrew Adie. SEC Newgate. April 2024.
• Key 2024 Sustainability Trends Driving the Year Ahead. Lai Ly and Lindsey Hall. S&P Global. January 2024.
• Seven Sustainability Trends to Watch in 2024. Andrew Winston. MIT Sloan. January 2024.
• The Many Colours of ESG Fraud. Becky Seidler. KPMG. April 2022.
• ESG for SMEs. Scott Baldwin. The Savvy Director. January 2022 (re-posted November 2023).
• The ABCs of ESG. Scott Baldwin. The Savvy Director. August 2020.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors who choose a growth mindset.

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