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ESG and Sustainability: What and why

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Let’s talk: Defining ESG and Sustainability

In this short interview we talk to Kate Shattuck, Senior Client Partner at Korn Ferry, on the common terms associated with ESG (environmental, social, governance) and Sustainability. Find out what ESG is, areas that may be covered within ESG, what sustainability is, and why it all matters.

What is ESG and how is this related to sustainability?

ESG (environmental, social, governance) provides a view of a company and its long-term value potential and relevance to its stakeholders. An ESG rating measures environmental and social impacts and the effectiveness of corporate governance in managing them.

Sustainability is the durability of a business over time, and one that generates long-term value. It's holistic - a sustainability strategy integrates ESG factors. I like to think about it like a house; sustainability is the foundation and ESG represents the structure on top – the operational and day to day actions of a company. But without the foundation, ESG can often be flimsy or fail.

And, what is really important for you to know is that investors use ESG criteria to make investment decisions.

Connecting the ESG agenda to financial results

Absolutely not. In fact, we are not alone in finding that great companies with a robust ESG agenda outperform their peers.

One example is how driving down energy costs create savings – and these savings immediately go to the bottom line. This is a great example of how leaders are making decisions for their organizations, their shareholders and the environment.

Another example is board diversity. We recently looked at some data for the pandemic and found that companies with diverse boards out-performed their peers during the pandemic, and specifically, it was age and gender diversity among board directors that correlated with significantly better financial performance during COVID-19.

Owning and driving ESG

Back to our house analogy, with sustainability as a foundation, and ESG as the walls, the piping, the wiring and the infrastructure, ownership of ESG is at the cultural level - and that is the roof. Without leadership at the top – buy-in from the CEO and the Board – you will have a leak and all that hard work could be ruined. Do you need plumbing experts – a head of ESG or a head of Sustainability? Absolutely – but the CEO needs to lead the culture agenda and business line leaders are really critical. We are seeing Division Presidents, CFOs, CHROs, Chief Investment Officers taking leadership roles in the sustainability strategy. This is a leadership issue, not a reporting, compliance or marketing issue.

ESG & Sustainability

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How is ESG measured and reported?

Transparency and reporting ESG are here to stay, but that sector definitely has framework fatigue.

Right now, there is no consistent or global framework to measure ESG. Investors from pension funds to sovereign wealth funds, to individual consumers, they need to look at different measures, and they should. This is because evaluating a tech start-up is different than measuring a flooring manufacturer, which in turn will be different from evaluating a retail store chain.

We see the most popular reporting frameworks as:

  1. TCFD
  2. SASB
  3. The UN PRI
  4. Global Reporting Initiative (GRI),
  5. B Corp Certification

And, in private equity, many people are watching the ESG Data Convergence Project to give PE investors reporting consistency.

Shape your ESG strategy for tomorrow

We can help you turn your ESG intent into action. We’ll work with you to not only shape your ESG and Sustainability strategy but to develop and articulate an action plan that organizes and activates your people to deliver on your ESG objectives. Find out more.

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