From CSR to ESG – why did the shift happen?
Corporate social responsibility - CSR has been a buzz word for a long time, shouting from company descriptions, always in a bold font and with a list of social responsibility achievements written down in job offers as a catchy benefit. The corporates tried to overrun each other in a competition of how to tackle CSR even in a more creative and more “out of the box” way. However for some time the term CSR has become more silent and seems to be hidden in one of the dusted boxes at parents’ house attic. What happened to the buzz word which right now seem like an outdated toy?
Corporate social responsibility - CSR has been a buzz word for a long time, shouting from company descriptions, always in a bold font and with a list of social responsibility achievements written down in job offers as a catchy benefit. The corporates tried to overrun each other in a competition of how to tackle CSR even in a more creative and more “out of the box” way. However for some time the term CSR has become more silent and seems to be hidden in one of the dusted boxes at parents’ house attic. What happened to the buzz word which right now seem like an outdated toy?
It is not that CSR disappeared completely. The mystery leads to three well-known letters: ESG. ESG seems like a beta-version of CSR: regulatory-driven, more mature, more complex, with bugs fixed. But at the same time broader and more demanding. So it would seem like a natural move – to turn into something that’s striving for excellency. But is it the only reason for this shift? Definitely not, we can be certain that corporates did their SWOT analysis on this very thoroughly. And according to it, apart from the apparent advantages like corporate transparency, positive impact on the environment and active approach towards social challenges - ESG simply pays off.
One of the biggest demands that stands behind switching from CSR to ESG are investor’s expectations. Customers, employees, and the broader society are now more aware of the impact of corporate operations on the environment, society, and governance. In the light of inevitable climate changes and challenges that humanity faces now, investors became more diligent and pickier and consider environmental, social and governance aspects of corporate operations as significant indicators of company’s condition. Looking at global trends - World Economic Forum’s Global Risks Perception Survey 2023-2024 (GRPS) shows anticipation of more turbulent times to come (54% of respondents anticipate Unsettled and 27% - Turbulent global outlook in next 2 years). When talking risks driving the forecasts, Extreme weather is at the top of the list (survey was conducted in September 2023, so the outlook might have shifted since then, considering for example an unstable geopolitical situation in the Middle East). The survey shows also that younger generation of leaders notices the increasing risks of climate change and puts extreme weather events, pollution, critical change to Earth systems, natural resource shortages and biodiversity loss and ecosystem collapse in their top 10 most significant short-term risks. As an implication, investors do want to know how the companies tackle these risks and mitigate them or worse – if they contribute to any of them. It’s now the responsibility and transparency that counts.
If investors are more aware and require from corporates to be socially and environmentally responsible, no wonder that companies want to be perceived as the ones who take these risks seriously and do their best to mitigate them. Investors trust and involvement lead directly to financial wellbeing of a company, doesn’t it? Hence it is not only a cautious approach and a short-term trend – studies show that investing in ESG does improve financial performance. According to the analysis of NYU Stern Centre for Sustainable Business and Rockefeller Asset Management, who collaborated to examine the relationship between ESG and financial performance in more than 1,000 research papers from 2015 – 2020, there’s a positive correlation between ESG and financial performance measured by KPIs such as ROE or ROA.
Corporates do not only want to attract investors by applying ESG principles into their operating rhythm, but they are obliged to be compliant with it. The big advantage of ESG over CSR is that it puts regulatory pressure on the companies to be transparent about their ESG agenda. As an example, the European Union has introduced Non-Financial Reporting Directive (NFRD), which makes it mandatory for large corporates to disclose their environmental, social and governance performance. Some stock exchanges around the world already require companies to report their ESG performance, Bloomberg, S&P, MSCI already give ESG ratings to companies, showing directly that social and environmental implications of company’s activity have impact on how the market evaluates it. It can be observed that ESG smoothly blends into the evaluation criteria of the businesses and can serve as an appealing factor for the investors. When looked back at CSR, it was only self-regulated and a “nice-to-have” for companies’ reputation. ESG with its regulatory angle makes it mandatory for companies to be transparent about their impact to society and environment and (indirectly) to commit that this impact will be positive.
In fact, ESG with its principles provides more quantitative insight regarding social responsibility – with data being a key word as these are numbers reflecting company’s actions in the field. While CSR tended to be more qualitative, ESG shows that environmental and social impact can be measured. It gives third parties a platform to put the companies next to each other and compare them quantitively. It’s quite visible that while CSR was a bottom layer of the social responsibility cake, ESG added more layers, fruits, and cream to it.
It is true that the whole ESG framework is still distant from being perfect. There are still accusations of green-washing and making the operations look better in the reports than they do look on a daily basis. Keeping track on ESG performance and disclosing the metrics is not an easy thing, with a whole lot of new-type data to be gathered and transformed, new requirements to be analysed and new processes to be set-up. There’s also another aspect: being constantly up-to-date with all the new incoming requirements – due to the dynamics of ESG there are constant amendments and new interpretations of existing legislation released to help the companies get through. The good thing is that the whole ESG agenda is being worked on regularly, the not-so-good thing is that is still not ideal (see for example a debate around Green Asset Ratio which heated up after financial institutions were to disclose the indicator in 2024 for the first time – the obstacles of GAR echoed through the whole sector, highlighting, and criticising its imperfections). Even if not perfect, it should be emphasized that shifting from CSR to ESG is a significant development in the business world which contributes to more sustainable future.
The evolution of CSR into ESG proves that the impact of large companies is now looked at in a more holistic way, taking into consideration not only its financial performance, but also a broader range of factors such as diversity, human rights, and climate change. The fact that ESG incorporated CSR principles substantiate the necessity of formalising social, environmental and governance measures of impact that corporates have on the surrounding they operate in. Apparently, this necessity was germinating on the market for some time already, together with awareness around all risks that today’s world is facing. It all seems like a right thing to do and, despite the reasons, should be considered like a big milestone into the transparency of corporate operations. Although this is still a marathon, rather than a single race, we should be proud that we already took a baton and are running with it together.
Sources:
- https://www.weforum.org/publications/global-risks-report-2024/in-full/global-risks-2024-at-a-turning-point/#global-risks-2024-at-a-turning-point
- https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf
