CSR Vs ESG: Interdependent Yet Distinct Cogs
For companies, Corporate Social Responsibility is no longer about projecting social and ecological accountability. Businesses are increasingly being scrutinized by regulators, consumers, and stakeholders. They want to see companies making more long-term commitments that achieve measurable results. They also want more transparency and governance from businesses on matters related to sustainability. As a result, businesses have realized there is a need for quantifying their social efforts in terms of measurable outcomes. This is where ESG comes in. It offers a way of clarifying, defining, and assessing a company’s social, environmental and governance efforts thus making CSR a vital and quantifiable feature of corporate strategies.
How ESG is pushing companies to take a quantifiable approach to sustainability
The interplay between a business organization and the planet has grown stronger with stakeholders demanding quantifiable, measurable action. A study by a global investment management company has shown that consumers are willing to pay up to 25 percent more for sustainable products. Another study has shown that 76 percent of consumers don’t want to do business with companies that are not sustainable or who mistreat employees. ESG also impacts talent acquisition and retention. A large majority of employees, about 86% according to a study, prefer to work for companies that have better value systems. Investors are also demanding to know more about the social and environmental impact of any organization they work with. It is not surprising that 95 percent of institutional asset owners have already implemented or are considering integrating sustainable investing practices across their portfolios.
Companies undertake CSR programs to make themselves accountable for their larger societal responsibilities. These initiatives may help companies showcase their good side, socially speaking, however, the impact of CSR programs is difficult to determine. For example, how does one measure the outcome of a company-sponsored marathon run for charity?
ESG criteria on the other hand takes the CSR agenda a step further to integrate environmental and social responsibility into core corporate strategy along with a strong governance framework. This helps it to deliver a deeper value. For example, the volatile risk landscape today has shifted from economic to environmental, and social. The World Economic Forum’s 2020 global risk report identifies eight out of ten most impactful risks emerging from the environment, society and governance. This means that not meeting ESG criteria can impact an organization’s financial performance and damage reputation. For example, a company failing to meet emission reduction goals may risk getting its ratings downgraded resulting in share price losses. Consider a manufacturer’s CSR initiative of embarking on an afforestation drive as another example. While the company’s CSR criteria would require them to plant those trees, their ESG policy would require them to make specific and firm commitments like planting a thousand trees by 2025 or ensuring a 15 percent increase in recycled material in their manufacturing process.
How companies can use technology to build an enterprise ESG program
To build an enterprise ESG program, companies need to ensure that ESG data must be embedded into the businesses’ strategic and technology decisions, right up to the board level. ESG is no longer just about ensuring compliance but also making transparent disclosures that encourage better investor relations, greater market opportunities, and stronger consumer loyalty. There are four ways that technology can help organizations with ESG reporting:
1. Enable an integrated approach to simplify compliance
Technology can simplify processes by centrally tracking all ESG disclosure requirements and mapping them to the business units and geographies. This makes reporting more structured and efficient. Companies can map ESG data to various values and frameworks to identify compliance gaps AI - powered ESG systems can collect component data at once while allowing technology to map this data to the appropriate framework.
2. Enable better visibility into ESG metrics
Technology can help automatically integrate ESG data from various sources onto a single platform. This provides a 360-degree assessment of the ESG impact enabling leaders to make data-driven decisions. One can also streamline and digitize the entire process of data collection bringing in more transparency across the organization.
3. Provide visibility and insights on third-party ESG risks
AI-enabled software can help provide a unified and real-time view of processes such as third-party due diligence, ESG risk assessments, and audits. These can be streamlined and automated for optimal efficiency. Using technology, companies can validate a supplier’s ESG information and identify potential threats faster. Leadership teams can use powerful dashboards and analytics to gain insights into third-party ESG risks, compliance, and performance for making informed decision.
4. AI-enabled frameworks can help embed ESG into the organization’s culture
Companies can use technology to get everyone involved in ESG reporting on a single platform and ensure people work towards common goals. Stakeholders from various departments can communicate and collaborate much more effectively. With clearly defined roles, everyone feels a sense of accountability and ownership for ESG.
Is CSR still relevant in the context of ESG?
According to some experts, the challenge many companies face is how to measure their sustainability efforts without compromising the value of broader CSR practices. Should a CSR policy be rejected because a measurable output cannot be derived? CSR policies may be broad and hard to measure but they can still help set the tone for the company’s sustainability objectives and fuel a desired culture of community. In retrospect, one may agree with the view that both CSR and ESG function as interdependent cogs in a company’s sustainability agenda and while one is focused on measurable results there is still value in CSR as part of an overall ESG strategy.
