The only way you may have failed to notice the explosion in interest in 'all-things-ESG' over the past 18 months would be if you had been hiding under a rock.

Yet being aware of debate and discussion is one thing. Understanding it in a meaningful way is something different entirely. Accepting that there is a difference between these two standpoints also begs a question about what organisations are really talking about.

ESG is not, after all, a new topic. It has been recognised as an issue in the investment community for many years, with environmental, governance and social concerns used alongside financial factors to measure the resiliency of portfolios. Conversely, the concepts of responsible business, CSR and sustainability have also enjoyed popular attention – but attention doesn't necessarily equate to understanding or action.

So, what is in a name? Are we talking about the same things or are these related, but different topics?

Seemingly a “catch all” phrase, when referred to correctly, ESG covers broad areas and includes aspects as diverse as climate change, human rights, labour standards, executive pay and much more.

Fund managers have been, and are, increasingly using information on these issues to build a picture of the likely future financial performance of a company. Their view – rightly – is that ESG frameworks can be a critical indicator of a company’s future financial performance, as proxy measures to demonstrate whether risks and opportunities are appreciated as a minimum and well managed as a preference.

According to the research and data experts MSCI there are three main drivers accelerating the use of ESG assessments.

To begin with, it is clear the world is changing. There is no doubt that the economic pressure placed on some industries by the Covid-19 pandemic has affected companies' exposure to ESG risks and their ability to manage them. Add to this, a new generation of investors bringing with them a new approach to investing.

Or, to put it another way, there is a growing body of research suggesting that millennials are asking more of their investments. It is no longer enough to “turn a profit”; with new investors equally concerned about the impact their financial assets are having on the long-term sustainability of our environment.

Finally, there is recognition that better data and technology offers more meaningful insights. Advanced technology in the shape of artificial intelligence (AI) and alternative data extraction techniques is increasingly helping to minimise reliance on voluntary disclosure from companies.

Like many other measurements, ESG – in its short history - has usually been expressed as a rating. This matters because ratings provide a lens for looking at what investors care about. With the growth of AI, there is a proliferation of products on the market which can provide ESG ratings on companies.

However, these are - more often than not - generated using publicly available information and may miss the full picture of an organisation's approach and intentions, being more concerned with fitting the topics into ESG boxes to produce a score at the end. Innovation is a prime example, as in this case, ESG assessments are not fully equipped to measure the impacts of novel approaches that do not fit easily into existing frameworks, thus they are often discounted.

While ESG remains a fairly rigid tool, Responsible Business goes a step further and covers the ethics, values and core offering of an organisation.

The OECD has defined Responsible Business Conduct as "making a positive contribution to economic, environmental and social progress with a view to achieving sustainable development and avoiding and addressing adverse impacts related to an enterprise's direct and indirect operations, products or services".

It may sound like a 'broad brush' approach, but the value comes from the way it gives companies greater flexibility to develop novel approaches to complex issues and an ability to work across sector divides. Responsible Business practices have impacts beyond investor confidence, and can make the difference in attracting new talent, and driving change in local communities, as well as advancing companies commercial interests.

So which matters more: ESG or Responsible Business?

Fundamentally a business can score well in ESG terms, sometimes being celebrated as a top ESG performer, but ultimately may not be offering a product or service which at the core is 'responsible'.

A good example of this is evident when looking at the difference between ESG and ethical investing. Aviva states that the significant difference between ESG investment and ethical investment is that the latter focuses more on moral and ethical judgements than investment considerations.

ESG investing can result in wider societal benefits, although decisions will also be grounded in financial returns, whereas ethical investing is primarily about ethical principles. Of course, ethical investors also aim to make money, but they may rule out certain strong financial performers because they don’t fit their ethical preferences.

Increasingly, true authenticity and trust amongst employees, customers and other stakeholders is only going to be delivered by focusing on what the right thing is to do for all; in other words, a focus on responsible business, rather than risk and compliance. Yes, the ESG rating criteria might prove to be a useful benchmarking exercise, but only by making sure you are looking strategically at your business as a whole, rather than through a risk/compliance lens will you succeed in the long term.

Ultimately the growth in ESG will result in greater transparency and hopefully a convergence of rating frameworks so we are all speaking the same language and so that the boardroom adopts a greater focus on the topics that are material to their business. Perhaps with double materiality gaining momentum the worlds of ESG and Responsible Business will become even more combined.

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