ESG ≠ Social Impact: 3 Important Differences
An Emerging Framework for Risk Management and the Stakeholder Value Chain
Traditional and for-purpose businesses are increasingly motivated to fully engage with the environmental, social, and governance (ESG) landscape. Understanding some of the buzzwords, as well as motivations and challenges within your business and sector, will make the process more valuable.
1. Risk Management vs. Doing Good
While there is some overlap between environmental, social, and governance (ESG) management and social impact, they are distinct concepts woven together by what is referred to as “double materiality.”
ESG refers to the consideration of environmental, social, and governance factors in investment and business decisions. It does not require adherence to any social or political philosophy, and the risks may be internal (e.g., industrial waste disposal, hiring practices) or external (e.g., weather events, political unrest.) The goal of ESG, at its essence, is about assessing and managing risk around factors affecting a broad range of stakeholders that include — but are not limited to — shareholders.
Social impact, in this context, refers to the positive social outcomes that are generated by business activities. These may include initiatives such as creating products or services that solve an unmet social need, doing pro bono projects that advance the mission of community nonprofits, or reducing negative environmental impacts as a result of company operations.
Double materiality recognizes the two-way relationship between ESG factors and their impact—both positive and negative—on a company’s financial performance, society, and the environment.
2. ESG Investing vs. ESG for Business Operations
The primary difference between ESG investing and ESG for business operations is their focus. ESG investing is focused on selecting and vetting investments that meet certain criteria around an organization’s standards and practices, while ESG for business operations is focused on improving a company’s own practices.
ESG investing considers environmental, social, and governance criteria alongside financial considerations in the investment decision-making process. These criteria may include factors such as a company’s carbon emissions, treatment of employees, board diversity, or risk management around other specific ESG issues. Investors may or may not hold personal beliefs that align with an organization’s ESG impact, but may choose to invest — or not — based on a company’s performance and level of transparency in these areas. By improving and reporting publicly on their ESG performance, businesses can increase their access to capital with financial decision-makers who are more likely to invest in companies that align with their values and demonstrate due diligence around a wider range of business risks. This can help businesses raise capital at a lower cost and improve their financial performance.
ESG for business operations is focused on making a company more sustainable and responsible in its operations. This can have benefits for both the company and its stakeholders, including employees, customers, shareholders, and broader society. While ESG for business operations may include specific corporate social responsibility initiatives, its purpose is primarily to manage risk and compliance requirements related to its policies and practices.
Both public and private companies have begun to address ESG in their business operations, whether in response to investor demands, recruiting needs, or regulatory requirements. Companies of all sizes and reach may be affected either directly or indirectly, as emerging regulations across the globe can affect deep-tier supply chains regardless of where their organizations are headquartered. These include Scope 1–3 greenhouse gas emissions reporting, public claims related to environmental impacts and initiatives, carbon tariffs, data protection, and labor practices.
3. Corporate Social Responsibility and Social Impact vs. Duty of Care
Corporate Social Responsibility (CSR) is defined as “a self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public.”
Social impact is sometimes used interchangeably with CSR. Although they are related, they have distinct meanings.
CSR refers to a company’s voluntary actions and initiatives aimed at addressing social and environmental issues, often going beyond legal requirements. It involves integrating responsible practices into core business operations, such as ethical sourcing, employee well-being, and environmental sustainability. Social impact specifically emphasizes the intentional and measurable outcomes a company achieves in creating positive social change through business activities and investments. Both CSR and social impact activities have broad benefits as well as potential costs that business leaders and board members must consider as part of their duty of care.
Duty of care refers to the “fiduciary duty requiring directors and/or officers of a corporation to make decisions that pursue the corporation’s interests with reasonable diligence and prudence. This fiduciary duty is owed by directors and officers to the corporation, not the corporation’s stakeholders or broader society.”
There is potential for conflict between CSR, a company’s social impact activities, and a board’s fiduciary responsibilities to maximize shareholder value. While pursuing certain CSR and social impact initiatives may require significant investments that could impact short-term financial performance, the long-term benefits of these initiatives — such as improved sustainability and stakeholder trust— may outweigh the short-term costs. It is up to the board to carefully weigh the potential benefits and risks of pursuing CSR and social impact initiatives relative to fiduciary responsibilities.
Many businesses have chosen to adopt public benefit corporation (PBC) legal structures that offer specific protections related to CSR and social impact activities. Some may further submit to third-party audited frameworks, such as B Corp Certification, that vet companies for a wide range of ESG standards and practices.
PBC status provides legal protections that support a company’s commitment to generating public benefits alongside profits. These protections typically include a mission-protection provision, requiring directors and officers to consider the public benefit when making decisions. PBCs also enjoy expanded stakeholder focus, allowing them to prioritize the interests of employees, communities, and the environment in addition to shareholders. Accountability and transparency requirements ensure that PBCs report on their social and environmental impact publicly. While specific legal protections and requirements vary by jurisdiction, PBC status offers a framework that legally safeguards and promotes the pursuit of public benefits in business operations.
The Gold Standard of Business Purpose
ESG and social impact are often mistaken to be one and the same, and both have champions and detractors with very different ideas about their purpose and value. Depending on your point of view, you may see ESG as an opportunity or a risk, a necessity or a nuisance, or something in between. In its most objective form, ESG is simply an emerging framework for assessing and managing risks associated with environmental, social, and governance issues material to your business. However, there is a growing body of evidence around the business benefits associated with a tailored ESG plan for your organization, both internally and in your ability to raise finance and win grants when needed.
Organizations that embrace both risk management and positive social impact as fundamental to their operations, then report consistently and transparently on their goals and progress will have realized the gold standard of business purpose: to create a resilient organization that optimizes ongoing value for itself and its stakeholders.
Aimee Koval is the founder of two New York public benefit corporations: Chronicle Advisers, advising small to midsize businesses on ESG strategy and implementation, and Metis Consulting Group, a technical and management consulting firm and B Corp.
B The Change gathers and shares the voices from within the movement of people using business as a force for good and the community of Certified B Corporations. The opinions expressed do not necessarily reflect those of the nonprofit B Lab.
