ESG and SDGs: Exploring the Relationship
It is probable that you have come across the acronyms SDG and ESG in recent times. This is because more and more businesses are starting to acknowledge the significance of Sustainable Development Goals (SDGs) and Environmental, Social, and Corporate Governance (ESG) in enhancing their operations. To maintain a competitive edge and thrive in any industry, it is crucial for businesses to adopt these concepts. This article will delve deeper into both SDGs and ESG to provide a better understanding of their importance.
Sustainable Development Goals
The Sustainable Development Goals (SDGs) are a set of 17 interconnected goals established by the United Nations in 2015, designed to address global challenges such as poverty, inequality, climate change, and environmental degradation. The SDGs aim to provide a blueprint for countries, businesses, and individuals to work towards sustainable development by 2030. The goals are universal, meaning that all countries are encouraged to implement them in their own contexts. The SDGs have gained widespread attention and support, as they represent a shared vision for a sustainable future for all.
Environment, Social and Governance
On the other hand, ESG stands for Environmental, Social, and Governance. There is no simple, universally accepted definition of ESG, and of course, the meaning of ESG differs from each perspective. In general, ESG is a set of guiding principles that companies, fund managers, and practitioners follow to ensure that they operate in a sustainable and responsible manner. For corporations, ESG serves as a sustainable strategy or framework that enables businesses to strike a balance between generating profits for shareholders and having a positive impact on the environment and society. Many corporations leverage ESG to attract socially conscious investors and customers while also serving as a defense mechanism in the event of negative publicity. By prioritizing ESG principles, corporations can improve their long-term financial performance and mitigate risks associated with environmental and social challenges.
Differences between the SDGs and ESG
- Globally accepted and acknowledged goals by 2030
- Clearly defined by 17 global goals, 169 targets, 231 detailed indicators and accompanying metadata
- Applies to everyone, including individuals and not just countries and companies
- No global definition and framework for ESG. In general it emphasizes the importance of "environment", "social" and "governance" for corporate management and growth.
- No standardized metrics to calculation or presentation of ESG metrics
Applies primarily to business, companies
At some extent, ESG draws a direct connection with the SDGs’ concept of creating ‘shared value’ that involves finding mutually beneficial ways to align market potential, societal demands, and policy action to promote sustainable and inclusive economic growth and well-being
While companies may find it easier to identify and align environmental and social considerations with the SDGs, the connection with governance is often more indirect and linked to their existing environmental and social functions. Nonetheless, all 17 SDGs can be associated with various elements of ESG considerations, ranging from tangible to intangible connections. Nevertheless, ranging from tangible to intangible associations, all of the 17 goals might be attributed to individual elements of ESG considerations.
So what is the problem?
ESG, in its current form, may not necessarily be designed to drive progress towards the SDGs or achieve a sustainable world.
Our current economic system has prioritized the maximization of financial value over meeting society's needs, resulting in a dangerous conflation of financial activity with societal well-being. This shortsighted approach places undue emphasis on generating infinite financial rewards from a finite system, with minimal safeguards in place to mitigate negative social and environmental consequences. As a result, economic activities are leading to numerous adverse environmental and social outcomes, posing systematic risks for investors, businesses, governments, the financial system, and society as a whole.
The economic system fails to appropriately account for negative externalities.
The current economic system's risk perception fails to consider all material externalities, which hinders the resolution of the underlying causes that threaten sustainability. Although there is an increased focus on climate-related risks in financial decision-making, this approach still undervalues future financial risks and overlooks emerging opportunities when viewing sustainability through the lens of ESG risks and financial materiality.
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The financial markets are experiencing a rise in short-termism and speculation. This trend is particularly noticeable in equity markets, where investors in the NYSE held assets for an average of 6 years after the Second World War, but only 7 months in 2017. High-frequency trading, which represents 50% of transactions by volume, has further accelerated this trend, with the average holding time reduced to just a few dozen seconds.
The impact of our economic system is not distributed evenly globally or even locally. Those who hold the most power to influence the system tend to benefit the most, while the consequences of the current system are often felt to the shoulder of the rest.
ESG and sustainability are currently generating unprecedented interest, but there is also a great deal of ambiguity surrounding their meanings and potential impact. There has been an explosion of ESG indicators and offerings that evaluate a company's ESG performance, as well as investment strategies and products related to ESG. As the number of signatories to the Principles for Responsible Investment (PRI) surpassed 4,000, by2025, global ESG assets are projected to surpass $53 trillion, accounting for over one-third of total assets under management. However, the sheer growth in interest and the abundance of ESG-related metrics and products does not necessarily guarantee significant positive impact or change.
"The separation of profit and planet is by design. ESG ratings which underlie ESG fund selection are based on “single materiality” — the impact of the changing world on a company’s profits and losses, not the reverse."
Kenneth P. Pucker & Andrew King