ESG, Sustainability and Impact Jargon Buster

What does the ‘E’ in ESG stand for?

The ‘E’ stands for Environmental and would include actions such as: building renewable energy plants, cutting down on carbon emissions, waste management, recycling, reducing our impact on the physical environment or cleaning up pollution. 

In other words, it’s anything which meaningfully improves the environment without causing any harm.

What does the ‘S’ in ESG stand for?

The ‘S’ stands for Social and aims to improve things for society.  This would include actions such as: standing up for human rights, improving the local quality of life, fighting for gender equality, financial inclusion and access to education or preserving local communities and cultures. It needs to be something which meaningfully improves an area of society, without causing harm to another.

What does the ‘G’ in ESG stand for?

The ‘G’ stands for Governance and is typically the most widely used. This would include actions such as: not being corrupt, not having child labour, not exploiting workers, not bribing politicians, encouraging diversity at senior levels, embracing a circular business model and giving your employees company shares and benefits.

Governance is controversial, as it seems like a company can be classed as ESG for behaving in a way that they should be doing anyway. For example, by not breaking the law, or not breaking the law too much. 

Why is ESG considered controversial?

Most people think that a company needs to have all three (the E, the S and G) to qualify as an ESG company. In fact, you just need one letter. There are also ESG rating scales which you can refer to, to see how and why a company has been classed as ESG. 

What does sustainability mean?

Sustainability refers to activities which contribute in some way to a sustainable economy or ‘doesn’t run out’. Sustainability in finance is about meeting our own needs without compromising the ability of future generations to meet their own needs. 

This would include actions such as: circular business models, long-lasting environmental change, zero waste and any financial activity which can continue to sustain itself forever without running out or causing something else to run out. 

Sustainability is regarded as greener than ESG but there is still substantial greenwashing.

What does impact mean?

Impact refers to a company that actively and purposefully improves the environment or society in a meaningful and undeniable way. Usually an impact company will have this mission at their very heart as the whole purpose of the organisation. 

To qualify as impact in finance the company should set out clear, measurable and tangible goals which benefit the planet. The senior leaders must measure and report back to their progress, often with an objective third-party in charge of auditing. 

Impact goes well beyond sustainability and ESG.