In order to understand key differences between Corporate Social Responsibility (CSR), Environmental, Social and Governance (ESG) and how they interact alongside the third developmental experience; impact investing, we need to understand what these acronyms mean and how they interact with one another.
Are they interchangeable or do they instead work collaboratively as functional processes to drive cultural and environmental change? There is value in utilising ESG and CSR and tangible commercial benefits of deploying such practices and policies within working organisations.
We see more established institutions such as Forbes and McKinsey & Co arguing that adding ESG or CSR to a business, adds “value to your business.” When one looks at environmental issues, like BP during the Deepwater Horizon crisis, or governance issues that have led to corporate reputation challenges by major investments banks we see how “S” within ESG is as common as “G” and “E”. We see the rise of the middle child “S”, emerge and driven by a shift from shareholder to stakeholder capitalism.
Understanding the Differences Between CSR & ESG
It should be noted that there would be no ESG without the creation and wider applicability of CSR within the sphere of business accountability and measurable and quantifiable metrics to help empower and drive societal and environmental change.
The key measurable difference is that CSR has its roots in business accountability whereas ESG provides a structured criterium to help calculate real measurable business metrics. The biggest problem with CSR is that it varies so much between divergent and convergent sectors and the constituent businesses therein. The ESG experience in a competing dynamic provides a greater structure for quantifiable metrics that can help identify issues in a way CSR’s theoretical and policy-driven consensus approach cannot achieve.
By utilising a metrics-driven strategy, as opposed to the traditional Corporate Social Responsibility model, by deploying ESG, investors and wider community stakeholders can understand how a business treats its supply chain, manages the ethical issues therein, how the business values and invests in their staff or even more crucially how they respond as a business to the climate challenge, diversity and cultural inclusion issues whilst developing and nurturing community engagement links.
Why ESG and Impact Investing Are So Different?
There is a large body of research surrounding this differentiation. This is powered by the growing interest by investors who are interested in environmental, social, and governance (ESG) issues. However, ESG as an investment-related activity provides a framework for investors who have a world-view, belief or personal/social circumstances that required prudency or a specific investment approach relating to ESG contextually.
However, according to Bain & Company, a growing number of venture capitalists and private equity firms, leap frogging traditional fund managers who are slower to adapt to ESG principles, are utilising ESG when strategically planning and functionally processing an investment opportunity.
But when we look at the research surrounding impact investing and the key differences, we identify other themes. Social impact investing, also known as SII, is all about the transformational capabilities of private capital being directed towards business or non-profit direct enterprises to help challenge key areas whilst providing avenues for social change. However, research highlights the challenge of nurturing awareness of SII over the more widely known ESG experience; this lack of awareness created challenges, holding back capital — because organisations undertaking great societal change are wary of impact investors because of a perceived sense that their project will be evaluated for the financial, rather than social, return on investment parameters.
What Does This All Mean?
CSR with its thematic focus, has empowered ESG with its metrics-driven focus to supersede it within the mindset of institutional, private or other financial organisational deployment. This is further enhanced by the growing drive towards social impact investing and how private capital can create social and economic returns on investment.
In relation to differentiation and purpose, by “thematic” investments through individual investor preference in relation to ESG issues help to drive unique solutions within a broad range of areas from drinking water to renewable housing (via social housing) to help drive change through private capital and real-world business/NPO solutions.
Impact investing has grown rapidly in popularity which is reflected in the scale of capital now being invested thematically around societal awareness for an urgency to address environmental issues and climate change.
This is partially due to the ability of impact investing having the structural and financial clout to go beyond ESG in terms of deliverables. This differentiation is critical as both strategies have a future role as the capital markets continue their evolutionary shift to a more ethical business model.
The rise of “S” in ESG, the shift on the global stage from shareholder to stakeholder capitalism also presents a nurtured environment for Impact, CSR, and ESG to play their part and not have to wait their turn.