‘Sustainability’ Could Become Perilous as ESG Terms Evolve, Report Warns

(Credit: Jefferies)

Financial services company Jefferies recommends that, when it comes to ESG and business leadership, corporate leaders should distinguish among three “overlapping but distinct” concepts: ESG investing, sustainability and sustainable development. And it warns that because the language surrounding ESG is evolving, with new terms becoming more prevalent, there is a risk that companies will be seen as lagging if they continue to rely on the term “sustainability.”

The new report from Jefferies global head of ESG and sustainable finance research Aniket Shah offers research and recommendations regarding how business leaders can develop a strategic approach to ESG and the ESG investment trend.

Shah’s description of the three distinct concepts include:

• ESG Investing: Focus on how material ESG factors impact financial performance of corporations.
• Sustainability: Broad communication/marketing term around a company’s efforts on climate and

  environmental issues.

• Sustainable Development: An approach to economic development that focuses on human welfare and environmental sustainability.

“Education on the terminology of the ESG space is critical,” Shah writes.

Risk and Legal Strategies

It is more important than ever for business leaders to develop their strategic approach to ESG, according to the report. “Liability risk is mounting. More than 1,650 climate-change-related lawsuits have been filed against companies and governments to date.” The report adds that this number has been growing by more than 15% a year for the past two years, and that more than 75% of all climate litigation cases are in the US. “We think US-based companies should, in the medium term, develop clear legal strategies on climate-related issues,” the report suggests.

The report identifies three additional major risks:

• The investor community still has not come to an agreement on what they care about from an “ESG” perspective. This can cause significant confusion for corporates.
• “Sustainability” is increasingly being replaced by more explicit terms, such as “net-zero alignment” for climate change or “materiality” for ESG frameworks. There is a risk that companies will be viewed as “one step behind” if they continue to rely on the term “sustainability.”
• Sustainable development is a holistic approach towards economic development. Companies can be seen as hypocritical and not contributing to the broader paradigm shift due to practices such as tax avoidance, lack of diversity and contribution to environmental damage.

The report outlines a “CEO Checklist” focusing on five strategies for ESG investing, sustainability and sustainable development. These include education, strategy, goal-setting, regulatory awareness and disclosure.