You have no doubt heard the terms corporate responsibility (CR), corporate social responsibility (CSR), environmental, social, and governance (ESG), sustainability, and a whole host of related terms and may have wondered what exactly they mean and whether they apply to your organization.
You may have noticed, as I have, that especially in the last year or two, a striking number of articles and information in accountancy, legal, and other business podcasts and publications devote larger and increasing portions of their content to ESG and sustainability.
You may have also noticed these or adjacent terms creeping into everyday conversations. Social and other media include widespread discussions about who or what actions are “woke”. You may recognize that the word “woke” relates to some ESG issues but may find yourself asking, “Wait … is woke good or bad?”
So, what do these words really mean? Why are they so confusing? And why should organizations care about them? The terms are all related but a bit different. First Reference Talks promised more on this topic in Sustainable development is a governance issue, so read on.
Corporate responsibility, or CR, is the earliest of the terms. It refers to a general approach by organizations to practice ethical conduct and be good corporate citizens in society. CR involves eschewing behaviours like the wanton or irreverent pursuit of profits or maximum shareholder value at all costs. Instead, organizations should be mindful of the impact of their actions and decisions on society.
Over time, CR became known as corporate social responsibility or CSR, the modern way to describe approaches once termed CR.
CR and CSR describe largely voluntary and general business approaches.
Then in 2005, the financial sector introduced the term ESG in a report under the “Who Cares Wins” initiative, (the “Report”). The Report resulted from a joint initiative of financial institutions across 9 countries, which the then United Nations Secretary-General Kofi Annan invited to develop guidelines and recommendations on integrating environmental, social, and corporate governance issues in asset management, securities brokerage services and associated research functions. The idea was that the organization’s financial performance and the overall benefits accruing to various stakeholders, including society, improve if financial institutions consider non-financial factors.
Despite its origins in the investment sphere ESG now has broad applications across all sectors and settings.
The “environment” in ESG needs no introduction and includes climate change, biodiversity, pollution, clean water, and similar topics.
The “social” in ESG refers to all the relationships between organizations (whether for-profit or not-for-profit) and their employees, customers, suppliers, the communities in which they operate, and other participants in society. In terms of employee relationships, for instance, health and safety, pay equity, privacy, and non-discrimination would be relevant issues.
The “governance” in ESG refers to the way that organizations define and conduct themselves strategically, as determined by their boards and with support from senior management. Relevant topics include board composition and diversity, board and executive compensation (especially compared to the rest of the organization’s workforce), board ethics and conflict of interest, and anti-bribery, anti-corruption, and anti-money laundering matters.
Sustainable development refers to progress and activities that enable current generations to meet environmental, social, economic, and other needs without compromising the ability of future generations to meet their needs. Sustainability occurs when current and future generations can meet their needs.
Therefore, all these terms are alike in that they focus on similar issues: the environment, society or social issues, governance, and their intersection with economic activities.
The differences and requirements
You may declare that your organization has policies regulating pollution, pay equity, health and safety, board compensation, and other matters so it meets CSR, ESG, and sustainability requirements. You could be wrong.
In addition to the differences in origin described above, a critical difference between CR and CSR on the one hand and ESG on the other is that CR and CSR are broadly stated commitments to good corporate citizenry, while ESG requirements demand quantifiable metrics that evidence these commitments. The metrics may arise from legislated or regulatory obligations. For instance, in Canada, securities regulators, bolstered by provisions in section 172.1 – Diversity in Corporations, in the Canada Business Corporations Act and associated regulations, require specific disclosures about board diversity.
Additionally, whereas there are already employment, environmental, and other statutes covering ESG-related topics, the body of ESG requirements demand more of organizations, are more focussed on the interdependence and intersections between E, S, G, and economic factors, and explicitly acknowledge that existing statutes and modus operandi are inadequate.
In one of many recent examples of ESG statutes, British Columbia enacted the Pay Transparency Act, which passed on May 11, 2023. The statute takes force gradually, from November 1, 2023, to 2026 and beyond. Among other requirements, prescribed employers must disclose expected pay and pay ranges in job postings. The goal of the statute is to eradicate pay discrimination and inequities based on gender, race, and other prohibited grounds.
On May 11, 2023, Canada passed a bill with the short title, Fighting Against Forced Labour and Child Labour in Supply Chains Act. The statute requires boards of prescribed entities to report to the Minister of Public Safety and Emergency Preparedness regarding the steps taken to prevent and reduce the risks of child or forced labour in their supply chains. The statute comes into force on January 1, 2024.
Various entities, for instance, the Global Reporting Initiative (GRI), set standards and frameworks to measure ESG achievements. Other entities, like Bloomberg and Sustainalytics score and rank entities and their ESG activities. The investment industry relies heavily on these frameworks and metrics. But so do other organizations that voluntarily want to demonstrate good corporate citizenry.
A critical difference between ESG and sustainability is that they have different goals. ESG duties require an organization to meet measurable metrics, however defined. Sustainability has distinguishing mandates, including intergenerational equity or the duty to consider the needs of future generations (and not just have CSR objectives or meet ESG metrics). (See Sustainable development is a governance issue). As a recent example, Bill S-5, Strengthening Environmental Protection for a Healthier Canada Act, received royal assent on June 13, 2023, and modernized the federal Canadian Environmental Protection Act, 1999. The changes stem from polluter pays, precautionary principles, intergenerational equity and other environmental sustainability principles. These changes are the first set of comprehensive changes since the statute’s enactment over 20 years ago.
Standardization
No methodology, framework, or standard is globally accepted as the ESG or sustainability benchmark. Requirements vary depending on legislation, jurisdiction, industry, and other factors.
What is clear, however, is that governments and regulators are increasingly trying to incorporate and standardize requirements, disclosures, and other aspects of ESG and sustainability. For instance, on June 26, 2023, the International Sustainability Standards Board (ISSB) issued inaugural standards for disclosing climate-related risks and opportunities as part of financial reporting (see ISSB issues inaugural global sustainability disclosure standards). The new standards are International Financial Reporting Standards (IFRS), namely IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 – Climate-related Disclosures. As with other IFRS, it will be up to standard setters in Canada and other jurisdictions to adopt and incorporate these standards locally. Adoption is likely a matter of when, not if, because the standards have broad, global appeal.
Where does woke fit in?
Woke is an adjective that originated in African-American communities. For a long time, it simply described a person who is alert to, informed about, or attentive to racism and, later, other social issues like sexism and other discrimination. However, accompanying the proliferation of ESG and sustainability in the zeitgeist, the word “woke” has acquired a pejorative tinge. There is now an inference that a woke person is extreme and unreasonable about ESG and sustainability matters.
Like other words related to ESG and sustainability, woke defies precise and uniquely accepted definitions and connotations. Woke is often politicized and is sometimes a source of ridicule or cynicism. (See Simon Kuper’s ‘Woke’ and other bogus political terms, decoded in the June 10/11, 2023 print edition of the Financial Times, for his take on “woke”, “We will meet this target by 2030, 2050, etc”, “Sustainable luxury, sustainable flying, etc”, “Cancelled” and other ESG-adjacent words and phrases).
One thing is for sure; all organizations need to up their ESG and sustainability game because regulators and governments are increasingly implementing mandatory requirements, society is demanding voluntary compliance, and there is every indication that this tide will continue in the foreseeable future.
Meeting your duty of care:
Put ESG and sustainability on board and governance agendas and create or update sustainability policies. Log in to the Operations and Marketing database in PolicyPro for OP 5.05 – Sustainability with tools to help you create and implement sustainability practices based on International Organization for Standardization (ISO) and other standards. Stay tuned for more policies on ESG and sustainability in various PolicyPro databases.
Policies and procedures are essential, but the work required to create and maintain them can seem daunting. The Finance and Accounting, Operations and Marketing, Not-for-Profit, and Information Technology databases in PolicyPro, co-marketed by First Reference and Chartered Professional Accountants Canada (CPA Canada), contain sample policies, procedures, checklists and other tools, plus authoritative commentary to save you time and effort in establishing and updating your internal controls and policies. Not a subscriber? Request free 30–day trials of Finance and Accounting, Not-for-Profit, Operations and Marketing, and Information Technology databases in PolicyPro here.
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