Misconception number 1: integrating ESG factors into decision-making makes an organization sustainable. Misconception number 2: a sustainable organization has a positive impact on society. Both misunderstandings are due to the confusion of concepts surrounding non-financial aspects of organizations. What's up with that?
ESG, sustainability and impact are all terms which are used interchangeably to describe the 'good intentions' of companies and institutions. The depth of transparency and realization of set objectives is not always communicated effectively or at all, which has led to cases of serious deception, of which the German asset manager DWS is accused.
One of the biggest misconceptions is that because an organization has an ESG policy, it would be categorized as sustainable by itself or even others. These are two completely different things. ESG is a framework for the non-financial factors that influence risk and return, especially environmental, social and governance factors (ESG). An organization with an ESG policy uses this framework to make informed decisions based on these factors, decisions that consider all relevant criteria. But does that make an organization sustainable?
That, of course, depends entirely on the trade-offs between the various factors and the weights assigned to the separate categories. For example, the fact that when production is expanded, water consumption is included in the decision-making process, does not mean that the solution with the least water consumption is chosen. In a similar comparison, taking human rights into account when choosing a new supplier does not automatically mean that the candidate which scores the best has been selected.
Whether or not an organization can claim sustainability also depends on the breadth of its efforts. An organization which manages to reduce its CO2 emissions is not by definition sustainable. After all, what about diversity, stakeholder management, child labor in the chain, the whistleblower's scheme, waste, et cetera? So, it is prudent to be careful with claiming to be sustainable, 'because we have an ESG policy'.
In line with the confusion between ESG and sustainability, there is also the common attribution of sustainability and impact. A sustainable organization likes to announce that it has a positive impact on society. Why isn't that always the case?
This is partly a matter of definitions, but that does not make the distinction any less relevant. Differentiated from sustainable investing, impact investing has conquered a place in the financial world and the question is whether organizations in which investments are made have a specific and explicit objective to make a positive contribution to society in addition to generating financial returns. That contribution must be measurable.
Then it is not about halving CO2 emissions, excluding suppliers with inhumane working conditions or moderating an exuberant bonus structure. These are commendable actions to minimize the organization's negative impact on society, but they belong in a different category than the organizations that strive to maximize their positive impact. These are organizations that create solutions for (global) social problems or contribute in some other way to the sustainability goals of the United Nations, especially with regard to the environment, circular economy, mobility and health.
Sustainable entrepreneurship and sustainable financing are served by clear and unambiguous language. Given the deluge of concepts, definitions, frameworks and abbreviations that has overwhelmed us in recent years, this is no easy task. But it is necessary to be able to separate the wheat from the chaff. So let's start with keeping the basics in order: don't confuse ESG with sustainability and sustainability with impact.