ESG, CSR, sustainability and impact: four different things

Four words appear again and again in annual reports, investor presentations and news stories: ESG, CSR, sustainability and impact. People often use them as if they mean the same thing. They do not, and mixing them up leads to bad analysis.

A simple way to separate them is to ask whose question each one answers:

• Sustainability asks: can this way of living or doing business carry on into the future without harming the people and resources it depends on?
• CSR asks: what does the company give back to society?
• ESG asks: how do environmental, social and governance issues affect the company's risk and value?
• Impact asks: what measurable change did this activity create in the world, and would it have happened anyway?

A company can be strong on one and weak on another. It can spend generously on CSR projects while its factories pollute heavily. It can have a good ESG rating because it manages its risks well, even if its products do little for society. Keeping the four ideas apart is the first step to reading ESG claims critically.

Sustainability

The broadest of the four. The best-known definition comes from the 1987 Brundtland Report of the UN: development that meets the needs of today without taking away the ability of future generations to meet theirs. Sustainability is a goal or a direction, not a measurement system. Companies use the word loosely, which is one reason it is easy to misuse.

CSR (Corporate Social Responsibility)

In India, CSR has a specific legal meaning. Section 135 of the Companies Act 2013 applies to companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the previous financial year. Such companies must spend at least 2% of their average net profit of the previous three years on activities listed in Schedule VII of the Act, such as education, health and rural development.

CSR is about spending money outside the core business. It says little about how the business itself is run.

ESG

ESG is an investor's framework. It looks at environmental, social and governance factors that can change a company's cash flows, risks or cost of capital. The focus is the company's own operations and value chain: its emissions, its safety record, its board, its related-party deals. In India, ESG is shaped by SEBI's BRSR reporting rules and its regulation of ESG rating providers.

Impact

Impact means a measurable, intended change in social or environmental outcomes. An impact investor wants to know: how many people got clean water, how many tonnes of emissions were avoided, and would this have happened without my money? That last question, called additionality, is what separates impact from simple good intentions.

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