Decoding the Differences between CSR and ESG for Sustainable Business

In the last decade we witnessed widespread emphasis on corporate social responsibility (CSR). Today, it is more about devising a measurable Environmental, Social, and Governance (ESG) strategy. ESG is perceived to be an extension of CSR in quantification, transparency, and accountability. Today, 96% of G250 companies report ESG performance and sustainability metrics. Though it is an excellent point to begin with, technically, there are more differences. Read the blog to understand the nuances and differences between CSR and ESG in-depth.

What is CSR?

Corporate Social Responsibility refers to the string of activities businesses undertake as a part of their voluntary commitment to the community and environment. It boosts the morale and reputation of the company among its consumers and stakeholders. Businesses usually present their CSR activities in their annual reports.

CSR commitments are a defining feature of a company’s values and culture and can be categorized under the following themes-

1. Environmental commitments, including pollution, renewable energy substitution, etc.
2. Philanthropic activities like making donations to nonprofits, charities, etc.
3. Community development through inclusion, social initiatives, and financial support.
4. Employee well-being with initiatives focusing on fair wages, diversity, and workplace inclusion.

What is ESG?

ESG refers to the comprehensive sustainability assessment with metrics that measure the environmental, social, and governance commitments of a company and validate its claims. ESG regulations vary based on the country and industry of operation of a business. Investment firms and global rating agencies like Bloomberg, S&P Global, etc. provide ESG scores based on the performance of the business. Such an assessment helps investors assess how sustainable the company is.

Why Do ESG and CSR Matter?

CSR helps create a reputation and credibility for businesses among their stakeholders. It is mostly focused on strengthening employee morale and retention. ESG has broader implications as it impacts business valuation and financial performance. Having a robust ESG framework speaks of the company’s long-term commitment to sustainability. Also, ESG programs can help businesses achieve optimal resource utilization and increased savings. While CSR helps build internal reputation, ESG programs consider the planet, people, and sustainability. A good ESG score is a demonstration of the company’s commitment to sustainability, which in turn helps attract investors.

To read about the 5 fundamental elements of a risk assessment process, click here.

5 Major Differences Between CSR and ESG

Now that you know what CSR and ESG are, let us understand their crucial difference. The difference between the two concepts can be understood based on five major aspects.

1. Scope and Stakeholders:

Compared to CSR, ESG has a limited focus, and it covers three main areas of sustainability- environmental, social, and governance. ESG aims to help businesses respond effectively to climate change and social problems. ESG reporting is mainly to disclose sustainability commitments and attract investors. CSR policy covers philanthropy, ethical, environmental, and social aspects. CSR activities primarily focus on community empowerment and help businesses forge a credible presence among their target customers. As they are majorly involved with employees, CSR activities help build team morale while assisting the business attract and retain talent.

2. Compliance vs Choice

In several countries, ESG reporting is part of corporate compliance and mandatory. They are getting standardized and regulated, pushing more businesses to monitor and report their progress on ESG commitments. For instance, in the EU, the Corporate Sustainability Reporting Directive (CSRD) mandates ESG reporting based on compliance with the European Sustainability Reporting Standards—which has five environmental standards, four social standards, and one governance standard. Yet another vital point among the differences between CSR and ESG is that companies don’t need to engage in CSR activities. They do it out of interest and voluntary commitment. Firms can participate in ethical, social, or environmental activities based on their priorities and values.

3. Quantitative vs Qualitative:

CSR activities are often qualitative assessments of a company’s commitment. The community engagement activities, social commitments, and ethical business practices are described as case studies and narrations. On the other hand, ESG is majorly quantitative, and businesses must track and disclose data against predefined metrics and criteria. Rating agencies and investors often use quantitative scores to rate companies based on their sustainability performance.

4. Level of standardization

ESG has standards and ratings, and several organizations have developed measures and frameworks to standardize ESG reporting. They help compare ESG scores and sustainability performance. Meanwhile, CSR policy and reports are not usually standardized, and individual companies develop their reporting format and style. So, ESG has a higher degree of standardization when compared to CSR.

5. Business valuation

As ESG is regulated and standardized against pre-defined criteria, it remains a measure of financial performance and business valuation. Businesses with good ESG practices are more sustainable in the long term, and their valuation goes up. As the ESG score rises, the capital cost of a business comes down, and its financial performance goes up. A key difference between CSR and ESG is that CSR initiatives are not directly linked to business valuation and financial performance. They help businesses build a positive brand image in the community. By demonstrating the values, the businesses indirectly attract more customers and employees.

How Can Businesses Integrate CSR and ESG?

Incorporating CSR and ESG demands a strategic approach and framework formulation. Here are the key steps that businesses can adopt to integrate these approaches into the business.

CSR integration tips

Incorporating CSR objectives into the business framework usually starts by understanding community needs and sustainability concerns and making them a key part of core business values.

Set goals

The first step in CSR programs is to set clear objectives and goals that align with the brand values and customer expectations.

Develop company culture

Work on building a culture that prioritizes community engagement as a core business value and an ethical principle.

Ensure Employee participation

Encourage employee participation and involvement in CSR activities. Motivate them to contribute to social causes, organize skill-based community engagement programs, etc.

Focus on community engagement

Offer community support by participating in local activities, charities, and other philanthropic activities. Work out sustainable ways to give back to the community.

Promote ethical business practices

Determine policies that promote fair treatment of labor, honesty, inclusion, diversity, etc., and communicate them to employees and other stakeholders.

Prioritize environmental commitments

Consider ecological concerns and commitments in all your business activities. Set policies prioritizing sustainable practices like renewable energy substitution, capacity utilization, energy conservation, etc.

ESG or CSR: Which Approach is Better?

ESG considers long-term sustainability and has more measurable measures than CSR. It evaluates risks and opportunities in specific aspects like carbon emissions, waste management, resource utilization, diversity, inclusion, fair treatment of employees, transparency, etc.

On the other hand, CSR is more internal and qualitative and helps build employee morale. If you evaluate CSR and ESG from the perspective of sustainability and external stakeholders like investors, customers, etc., ESG takes a more appropriate measure. It must be noted that ESG reporting is becoming mandatory and a determinant of a company’s financial performance.

ESG Integration Best Practices

Integrating ESG requires a more organized and systematic process of setting measurable goals, collecting and measuring data, and reporting them against each metric. Here are some of the best practices.

1. Identify ESG risks and opportunities

The first step in ESG integration is to evaluate each process in your supply chain and identify potential risks in sustainability. Explore opportunities for enhancements and determine the overall business strategy.

2. Set measurable objectives

After identifying the risks in your supply chain sustainability, determine measurable goals and objectives to address them. Communicate them to all stakeholders, including investors, customers, suppliers, etc.

3. Invest in a robust ESG software system

ESG software helps automate the data collection and management process and check for alignment with industry practices and regulatory frameworks. You can set metrics and track performance against each of them. It helps save time and effort and promotes consistency in ESG reporting.

4. Engage stakeholders

Involve suppliers, customers, and other stakeholders in identifying potential risks and determining the ESG goals. Promote collaborative efforts in addressing them.

5. Measure progress

Devise a structured mechanism for measuring ESG progress. Businesses undertake data audits, site visits, etc., to ensure a successful ESG implementation. Determine KPIs and metrics for measurement of progress and performance. They should include both qualitative and quantitative measures. Conduct supplier training and establish stringent measures for tracking their progress.

How does VisiumKMS Drive ESG and CSR Management?

VisiumKMS is a leading QHSE software that helps businesses drive, measure, and track their ESG strategy and performance. The software helps promote supply chain transparency by streamlining the flow of data and information and monitoring the social and environmental aspects. The comprehensive ESG software from VisiumKMS simplifies and automates the collection and reporting of environmental and sustainability data. The software features can be customized to meet the unique requirements of a business. For instance, If a business is in an industry that demands compliance with multiple standards, you can customize the features of VisiumKMS to take up audits at different points. VisiumKMS offers a perfect solution to small and medium businesses in a wide range of industries, including oil & gas, chemicals, manufacturing, healthcare, transportation & logistics, etc.

Environmental data

VisiumKMS has advanced abilities that measure ESG data and sustainability metrics, including air pollutants, greenhouse gasses, wastewater discharge, water usage, energy consumption, waste metrics, etc.

Tracing & Audits

VisiumKMS helps track the entire string of activities in a supply chain and business operations and reports the analytics on an intuitive dashboard. It takes up periodic audits and recommends corrective actions and continuous improvement solutions to stay on track.

For further information about supply chain sustainability, get in touch with our experts by submitting your details at this link. Alternatively, you can get in touch with our experts at (713) 492-7290.

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