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ESG vs. Sustainability: What’s the Difference?

You’ll often hear ESG and sustainability in the same sentence — in some cases, you might even see them used interchangeably. But they are not the same thing. When it comes to disclosing and benchmarking data, there’s actually a remarkable difference between the two. Though the larger discussion among industry leaders began with sustainability, ESG’s scope, practices, and relevance to capital opportunities have led to a substantial shift in the way companies measure and disclose their performance. 

“Sustainability” can mean just about anything under the broad rubric of “doing well by doing good.” This makes it a convenient yet inaccurate substitute for other related but distinct terms like “corporate responsibility,” “triple bottom line,” and the old standby, “green.” Like “green,” sustainability is an overused label that begs to be replaced by a more meaningful rubric. 

ESG — or “environmental, social, governance” — has become the preferred term for capital markets. That type of data is often used to identify superior risk-adjusted returns. But ESG has recently become a familiar acronym throughout many industries, including commercial real estate, and is frequently making headlines. This shift in vernacular has felt sudden to some. However, the emphasis placed on all three of these pillars along with the time involved in planning and implementing necessary changes tells us it’s time for companies to collect, report, and act on ESG data. 

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Graduating from Sustainability to ESG

Change is good: The transition from sustainability to ESG performance indicates a maturation of business practices to a more precise measurement of a portfolio’s performance. As the industry becomes more sophisticated, we need to improve the way we collect and track metrics to build ESG management accordingly.

Sustainability managers often work on environmental programs aiming for results that can be tracked using familiar metrics: carbon equivalents, energy intensities, or gallons of water consumed. They engage stakeholders through surveys, campaigns, and marketing efforts in these initiatives. And they develop sustainability targets which may include aggressive carbon-cutting or offset efforts involving all aspects of their organizations.

Watch The ESG Era: New Sustainability Metrics for Commercial Real Estate

Common among these new initiatives is that they (a) fit into the precise rubric of ESG and (b) are measurable. While quantitative metrics like energy consumption are more easily monitored, there is an expanding scope of what is material, and therefore more ways to track and manage ESG programs. Policies either exist or don’t, and are implemented at a specific time with documentation to prove they were enacted. Progress toward carbon targets can be tracked and reported against a baseline. 

All of these things may add up to a more sustainable organization, but at the point of implementation, these initiatives are far better captured by examining them through the lens of ESG rather than the broad umbrella of sustainability. 

ESG has also become an increasingly important metric for capital markets. Companies with high ESG performance have proven to have lower risks, higher returns, and are more resilient in times of crisis. With leading ESG performance, real estate owners will find they have better managed, more efficient properties while attaining superior access to capital.

Maturation of the market signals the next phase of ESG

Now that ESG has gone mainstream, companies are facing more discerning questions about their performance in these areas. While most ESG disclosure is voluntary, these benchmarks have become a regular requirement for key stakeholders, including investors and tenants. 

So what’s next? Increasingly, companies will be expected to ensure that they have high quality, accurate ESG data suitable for investment decisions. To achieve Investment Grade ESG Data, companies must collect data that is timely, accurate, complete, and auditable. With this development, the question is “Can you collect ESG data?” but rather “How trustworthy is the data that you’re collecting?”

It may all seem like a matter of semantics, but in this ever-evolving market, it’s important to understand the difference in order to zero in on what matters. Sustainability is a blanket term—a catch-all for any company’s efforts to “do better.” ESG, on the other hand, spotlights three specific pillars that are crucial to today’s business managers and investors. 

This blog was originally published on July 24, 2018, and has been updated to reflect changes in the industry.

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