Johnson Partners and Thomas Clarke, editor of the Cambridge University Press Elements in Corporate Governance book series and founder of the UTS Centre for Corporate Governance Research Centre, break down the differences between CSR and ESG and how each contribute to value creation in the latest piece from the Johnson Papers thought leadership series.
Excerpted from Johnson Partners:
What is the difference between CSR and ESG?
Both CSR and ESG have become part of the mainstream of company and investor policy. Once they were at the margins of company interests but now they are firmly part of company profiles and often embedded in company purpose.
The crucial distinction between CSR and ESG is the introduction by the investors of the “G” for governance. Large institutional investors saw governance as the crucial corporate capability to be measured in order to ensure the delivery of not only environmental and social responsibility – but most importantly – the assurance of sustainable value creation.
Here is the crux of the distinction between CSR and ESG:
- CSR was developed largely by companies, in conjunction with consultancies and rating agencies, interested in projecting and measuring the extent of corporate social and environmental responsibility as part of their profile with investors, customers, employees, government and community.
- ESG was developed by institutional investors, as they wanted an independent and rigorous set of measures they could apply across the companies in their investment portfolios, and a responsibility ruler they could run across any intended corporate investment.
The reason that investors wanted to see their own measures applied, was of course a lingering view that company driven CSR policies and measures might be influenced too greatly by company executives view of the interests of the company, and possibly descend into cosmetic presentation or even illusory achievements.
How do CSR and ESG contribute to value creation?
Enlightened CSR and ESG policies offer opportunities to create value through all-round improvements in business relationships and performance:
- Reduced regulatory intervention
- Enhanced reputation and stronger brands
- Better relationships with business partners
- More loyal customers
- More engaged staff and greater ability to attract them
- Cost savings
- New products
- Minimising risks
- Lower cost of capital
- Valuation premium
The relevance of CSR and ESG
The relevance of the increasing rigour in both CSR and ESG performance measures is that they may provide more consistent, comparable, and credible assessments of the social and environmental impact the performance of companies. In turn this helps build better relationships based on integrity with investors, customers, employees and communities.
Want to learn more? Find examples of CSR and ESG measures and how to approach reporting in the full article here.
Johnson Partners, the leading board advisory and executive search firm across Australia and New Zealand, is a part of Caldwell’s strategic partnerships in Asia Pacific.
