What is the difference between CSR and ESG?

What is the difference between CSR and ESG? If you’re getting into the weeds with corporate sustainability, you’ll likely see the term ESG everywhere but, especially in older documents, you might also encounter the term CSR.

The bottom line is that while there’s a good deal of overlap, there is a technical difference between the two. If your role is connected to sustainability in any way, it’s vital that you understand what separates one from the other as well as how both have evolved through the long history of corporate efforts to take care of the planet and its people.

Corporate social responsibility is an idea. Its central point is the concept that businesses have a responsibility to society and the environment. Some definitions classify CSR as a business model rather than simply an idea; this is likely in the context of businesses that have agreed to pursue the idea in practice. Many have, and many haven’t, but in modern business, it will likely be up for discussion at some point, no matter what sector or country you’re in. 

Important elements of CSR discussion include lowering carbon footprints, improving labour practices, improving community relations, and charitable activities, pursuing employee well-being, and having diversity strategies.

The key point about CSR is that, as an idea, the above elements are often talked about as principles – nothing more. Quantification and metrics happen in other contexts, particularly that of ESG, which you can read more about below.

ESG means Environment, Social, and Governance.

At its core, it’s an investing tool. It’s an intricate network of metrics designed to help investors assess companies’ commitment to the planet and its people. Such assessments can be done in isolation, but many involve companies being measured against each other. 

In practice, ESG often allows clear visibility on which company is more “environmentally friendly”, “socially just”, “well governed” and other interrelated principles.

Who does the actual judging when it comes to these metrics? It’s mainly dedicated ratings companies with expertise in the area. Their verdict influences how companies are seen in the eyes of stakeholders. In modern times, ESG metrics can have a significant impact on a company’s valuation. Many investment pathways deliberately only include companies with high ESG ratings, because that’s where many stakeholders want their money to go. 

CSR is an idea, a principle. ESG is a scorecard system, an investing tool. The former sets out goals while the latter measures the goals in practice. 

While ESG concerns itself with the same focus areas as CSR, ESG is more practical. It transforms words into actions through concrete measurements – often using standards that are increasingly known and respected worldwide – to show how companies are performing on CSR-related principles. 

Because of ESG’s practical nature, it has rapidly won out in terms of “airtime” at board and C-suite meetings. Many companies will look at CSR principles only through the lens of ESG; CSR might not even get a mention in many contexts.

You’re far better off not thinking of the two as an “either-or” choice. In reality, they are complementary.

Practically, however, stakeholders and strategy will remain largely concerned with ESG in the first instance. It’s more practical and can give a better picture of a company’s strategic direction than CSR.

What is CSR?

People today are more socially conscious than ever, and buyers are prepared to pay more for sustainable products. Companies can report their efforts to buyers and other stakeholders by developing a CSR model. Promoting CSR has become a critical part of brand management. 

The activities in a CSR strategy include lowering the business’s carbon footprint, corporate volunteering, improving labour practices, and engaging in charity. For example, Microsoft aims to reduce its carbon footprint and help customers do the same. Verizon has provided school children with technology to help them engage in virtual learning, thus reducing the digital divide. 

Since ESG is more quantifiable, this may win out as a more popular measure. 

What is ESG?

ESG stands for environment, social, and governance. Rating agencies can round up performance in these areas as a score similar to CSR but more measurable. ESG improves the valuation of the business, and more capital becomes available. Investors can use ESG as a measure of how sustainable the company is. 

The pandemic has increased awareness of such practices. Without some such measures in place, it is likely to become more challenging to maintain corporate reputation and financial success in the future. Since ESG is more quantifiable, this may win out as a more popular measure. 

CSR can be excellent for driving awareness of initiatives, but ESG can provide solid numbers behind them. 

CSR vs ESG

Such policies help inform the public about the values and goals of the business. CSR practices are usually self-regulated and can have a lot of variation. It is a more qualitative measure and can be challenging to define. ESG, on the other hand, provides investors with a measure they can use to decide which companies to invest in. 

Both CSR and ESG could be used by a business simultaneously. CSR may provide an internal framework for the company to communicate with employees, while ESG provides measurable goals. So, CSR can be excellent for driving awareness of initiatives, but ESG can provide solid numbers behind them. 

To incorporate ESG, the business can conduct a materiality assessment.

How can businesses incorporate these approaches?

To incorporate CSR practices, businesses can consider the company culture, its impact on the environment, and its relationship with the local community and can educate employees on how they can be part of the solution.

To incorporate ESG, the business can conduct a materiality assessment, collect insights from stakeholders, set goals and conduct a gap analysis, develop a measurable roadmap and KPIs, and report on progress. 

ESG programs can even lead to cost savings by reducing waste and helping to attract better talent. 

Why do ESG and CSR matter?

CSR is not just about the external impact of company policies but also the internal, as it can help employees feel empowered to do good and embrace diversity. This can further boost employee morale and retention. 

ESG helps to highlight the ethics of the business to the external world. Companies who signal that they are using actionable ESG criteria show that they have a long-term vision and are viable opportunities for investors. 

ESG programs can even lead to cost savings by reducing waste and helping to attract better talent. 

Essentially, ESG considers the ethics of the business in terms of people and the planet, and while in the past, the focus might have been on profits, this has now been swapped out with governance. CSR can be good for building accountability within the organisation itself. Still, ideally, you would want to have this and a strong ESG rating, demonstrating to the outside world that your business is sustainable. 

Some might say that ESG is an advancement on CSR as it is more measurable. 

Which approach is better – ESG or CSR?

ESG might consider specific things, including carbon emissions, deforestation, waste management and water usage, diversity and inclusion, fair labour practices, executive pay, internal corruption, and lobbying. 

So, there are both similarities and differences between the terms CSR and ESG. They can be used together as strategies within your business, although some might say that ESG is an advancement on CSR as it is more measurable. 

In summary, CSR can be used to build awareness and highlight goals within the business and is more qualitative. At the same time, ESG provides metrics that can instil confidence in investors and the broader market. 

Here’s a free ESG report template you can use.

Video discussing CSR and ESG

Watch Laura Heuston below examine why businesses must develop a more complete picture of their sustainability agenda. Laura also discusses the role of directors in effectively overseeing and reporting on sustainability, CSR and ESG.

• Corporate Social Responsibility (CSR): What It Is, How It Works, and Types
• What Is Corporate Social Responsibility? 4 Types
• Environmental Social Governance (ESG)