Mythbuster on ESG: The difference with CSR, is it the same thing?

What is CSR?

CSR stands for Corporate Social Responsibility. It refers to the practices and policies implemented by companies to manage their impact on society and the environment. This includes ethical business practices, sustainable development efforts and community involvement. CSR aims to ensure that companies operate in a socially responsible manner, making a positive contribution to society while remaining accountable to their stakeholders.

Simply put, it's a company's responsibility towards the environment and the communities in which it operates.

In recent years, awareness of CSR has grown considerably: it is estimated that 90% of S&P 500 companies published a CSR report in 2019, compared with just 20% back in 2011.

Where does CSR come from?

CSR emerged in the mid-20th century, when companies began to recognize their impact on society and the environment. The concept grew out of the growing awareness and expectations of consumers, governments and pressure groups that companies should not only focus on profits and shareholders, but also make a positive contribution to society by taking into account the entire value chain and all stakeholders. The idea gained ground in the 1970s and 1980s, as globalization increased the influence of business and the need to adopt ethical practices. Today, CSR is a widely accepted approach, integrated into the strategic planning of many organizations. In 2010, the International Organization for Standardization (ISO) published ISO 26000, a set of voluntary standards designed to help companies implement social responsibility.

What is ESG?

ESG stands for Environmental, Social, and Governance. These are the three main factors used to measure sustainability and ethical impact usually used when investing in a company. Here's a brief overview of each component:

-Environmental: this covers a company's impact on the planet, such as its carbon footprint, waste management, resource use and efforts to combat climate change.

-Social: This covers a company's relationships with its employees, suppliers, customers and communities. This includes labor practices, diversity and inclusion, human rights and affected communities.

-Governance: This concerns corporate management, executive compensation, audits, internal controls and shareholder rights. It evaluates the company's management and decision-making policies, practices and procedures.

ESG criteria are tangible, focusing on data, science and metrics needed to inform corporate decision-making, or investors' selection of potential opportunities, to ensure that their investments support sustainable and responsible business practices.

Where does ESG come from?

The concept of ESG criteria emerged in the early 2000s, based on the principles of corporate social responsibility (CSR) and socially responsible investment (SRI). The term ESG was popularized by a 2004 report entitled “Who Cares Wins”, a joint initiative by financial institutions such as major banks and insurance companies, the UN Global Compact and the International Finance Corporation (IFC). This report argued that integrating environmental, social and governance factors into capital markets made good business sense and could lead to more sustainable markets.

ESG criteria gained momentum as investors, companies and regulators recognized the importance of sustainable and ethical business practices for long-term financial performance and risk management. Today, ESG criteria are widely used by investors to assess the sustainability and ethical impact of their investments.

Key differences between CSR and ESG

CSR and ESG are both frameworks that guide companies in their ethical and sustainable practices, but ESG is more data-oriented and science-based, while CSR is drived by purpose and mission statements.

CSR focuses primarily on a company's overall impact on society and the environment through voluntary initiatives such as community involvement and sustainable development efforts. It aims to build trust and enhance the reputation of stakeholders, including employees, customers and communities, often using qualitative and less standardized reporting methods.

In contrast, ESG refers to specific, measurable criteria used to assess a company's environmental, social and governance performance. ESG measures are generally used by investors to assess the sustainability and ethical impact of their investments, integrating these factors into financial analysis and decision-making. ESG reports are quantitative and standardized, providing detailed data for benchmarking and comparison.

While CSR initiatives may be more peripheral to a company's core strategy, ESG factors are often deeply integrated into strategic planning, decision making and business management.

CSR more likely to be greenwashing

CSR is generally more susceptible to greenwashing than ESG. because of 4 main aspects:

-CSR lacks the standardized metrics and reporting frameworks that ESG has. It is therefore easier for companies to selectively highlight positive initiatives while ignoring negative aspects.

-CSR is also often voluntary and self-regulating, allowing companies to choose which activities to report and how to present them, which can lead to exaggerated claims.

-As CSR is image-driven, initiatives can sometimes be aimed at improving a company's image rather than bringing about substantial change. This focus on public relations can lead to greenwashing if initiatives are superficial.

-CSR reporting tends to be more qualitative and narrative-driven, which can mask the real impact of a company's practices. This lack of rigorous quantitative data can hide the reality of a company's environmental and social performance.

ESG, on the other hand, implies more rigorous and standardized reporting practices, with specific and measurable criteria. Investors and regulators use ESG parameters to assess a company's performance more objectively, making it harder for a company to lie about its environmental and social performance, and more difficult to greenwash.

Conclusion

In short, CSR  and ESG have different but complementary objectives in the field of sustainable business practices. CSR allows us to set objectives and establish a company's direction and values. It lets us know where the company wants to go and what it stands for. It can be used as a communication tool, story-oriented content to promote your actions in a more engaging way than ESG.

However it needs to be back up by ESG reports to avoid greenwashing! ESG reports are more measurable, detailed and scientific, providing concrete data on a company's environmental, social and governance performance. So, if you want to know about a company's commitment to sustainable practices and their real impact, ESG reports are a more suitable and reliable resource. While if you want to understand a company's long-term vision and values, CSR initiatives provide valuable context.

By understanding both CSR and ESG, you can make more informed decisions about the companies you support and trust.

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FAQ's ❓

Is CSR reports mandatory?

-           For large companies (more than 500 employees) in European union’s countries it is mandatory

-           However, it is not mandatory in the United States, Canada and China. They are on a voluntary basis.

Is ESG reports mandatory?

-           ESG disclosure is mandatory in the European Union for large companies.

-           In the US it is almost the case, not fully mandatory yet however the market drives strongly ESG reporting.

Do companies in Europe have to do both a CSR report and an ESG report?

-           European companies need to fulfil the regulatory requirements of the CSRD, it includes CSR report components and ESG components.

-           Therefore, one comprehensive report on non-financial information is enough as long as the report cover all necessary aspects of ESG issues, as well as broader social responsibility topics.