Know the Difference Between CSR and ESG

Over the years, an increasing number of companies have ventured to change the way they interact with the society and environment, going as far as making societal impact an important aspect of their branding and business strategy. This has given birth to many forward-thinking and ethics-first business ideas and concepts. In fact, in the world of corporate responsibility and sustainability, there are two acronyms that often surface in discussions these days: CSR (Corporate Social Responsibility) and ESG (Environmental, Social, and Governance).

If you have been researching either one of the terms, you must have a question about how ESG is different from CSR and where the concepts meet. While both terms are concerned with ensuring that businesses operate ethically and sustainably, they both have distinct focuses and implications. Understanding the differences between CSR and ESG is crucial for a company that aims to navigate the area of ethical and sustainable practices.

Before we discuss about the differences between the two concepts, let’s first try to understand what these mean and entail:

Corporate Social Responsibility (CSR): CSR refers to an organisation’s voluntary actions that it takes to address social and environmental issues and promote positive social impact. Engaging in CSR activities involves integrating social and environmental relevant to the organisation into its business operations and even when it comes to its stakeholders.

A company’s CSR initiatives are primarily driven by its desire to contribute positively to society, build its brand’s reputation, and also build trust among its stakeholders. While CSR activities may lead to long-term financial benefits for the organisation, they are often seen as investments in social and environmental well-being rather than direct profit-generating endeavours.

What Does CSR Include?

- Philanthropy: CSR often involves charitable donations, volunteer programs, and community development initiatives aimed at giving back to society.

- Ethical Labour Practices: This means ensuring fair wages, safe working conditions, and labour rights for employees and supply chain workers.

- Environmental Sustainability: This includes implementing eco-friendly practices, reducing their carbon footprint, and minimising environmental impact.

Environmental, Social, and Governance (ESG): ESG factors are used to evaluate a company’s performance in three key areas: environmental stewardship, social responsibility, and corporate governance. ESG has gained traction in recent years criteria are being increasingly integrated into investment decisions to assess the sustainability and ethical impact of investments in a company.

ESG analysis aims to identify companies that are well-positioned to manage risks and capitalize on opportunities related to environmental and social trends. Investors increasingly consider ESG factors as indicators of long-term sustainability and value creation potential. Companies with strong ESG performance are often viewed as more resilient, responsible, and attractive investment opportunities.

What Does ESG Include?

- Environmental Factors: This includes a company’s impact on the environment, such as carbon emissions, energy efficiency, waste management, and resource conservation.

- Social Factors: Evaluating a company’s relationships with its employees, customers, suppliers, and communities. This involves considerations such as labour practices, diversity and inclusion, human rights, and community engagement.

- Governance Factors: Assessing the quality and effectiveness of a company's leadership, management structure, transparency, and adherence to ethical standards. Governance issues may include executive compensation, diversity in the board, and anti-corruption policies.

CSR vs ESG: What Are the Differences between the Two

CSR and ESG are mainly different in terms of their approach towards the environment and sustainability. Here are a few areas where their focus differs:

- What Does it Include: CSR typically encompasses a broader range of voluntary initiatives, including philanthropy and community engagement, whereas ESG focuses specifically on evaluating environmental, social, and governance factors that are relevant to business sustainability and investment decision-making.

- Business Strategy: CSR initiatives are often standalone activities driven by ethical considerations and social impact goals, while ESG factors are increasingly integrated into business strategies, risk management practices, and investment analysis.

- Stakeholders: CSR focuses on a company’s standing as a corporate citizenand emphasises the company’s role as a responsible member of the community. In contrast, ESG analysis considers the interests of various stakeholders, including investors, by assessing the company’s ability to manage environmental, social, and governance risks and opportunities.

Here is a snapshot of all the differences between CSR and ESG

How Are CSR and ESG Similar

While CSR and ESG focus on different aspects of the business, there are several similarities in their objectives and approaches.

- Focus on Sustainability: Both CSR and ESG focus on the importance of sustainability. CSR typically concentrates on the broader impact of a company’s actions on society and the environment, while ESG specifically evaluates the sustainability performance of a company based on environmental, social, and governance criteria. However, at their core, both frameworks focus on practices that ensure the long-term viability of a company.

- Stakeholder Engagement: Both CSR and ESG involve engaging with stakeholders. Businesses have responsibilities not only towards their shareholders but also towards their employees, customers, communities, and the environment. Within the ESG framework, companies focus on stakeholders in the decision-making processes, so that they can better understand the latter’s concerns.

- Transparency and Reporting: Transparency is a fundamental principle of both CSR and ESG. Companies are encouraged to be open and honest about their social and environmental impacts, as well as their efforts to address them. This often involves disclosing relevant information through annual reports, sustainability reports, or even having dedicated sections on their websites. This transparency helps companies build confidence among their investors and other stakeholders.

- Regulatory Compliance and Standards: While CSR and ESG are voluntary frameworks, they are often influenced by regulatory requirements and industry standards. Many companies have adopted CSR and ESG practices to comply with the relevant laws and regulations that are applicable in the country. Additionally, there is a growing trend wherein organisations are developing frameworks that will help them evaluate their performances under several metrics.

CSR as a Part of ESG

While CSR and ESG are often discussed as distinct frameworks, CSR is usually considered a section within ESG primarily because of the social and environmental factors. Here are a few ways in which CSR acts as a part of the wider ESG framework:

- Social Component of ESG: As we discussed earlier, CSR initiatives primarily focus on addressing social issues. These social issues align closely with the ‘S’ component of ESG, which is based on evaluating a company’s relationships with its employees, customers, and the community. CSR activities, such as employee volunteer programs, diversity and inclusion initiatives, and community engagement efforts, contribute directly to the social aspect of a company’s ESG framework.

- Environmental Component of ESG: While CSR traditionally focuses on social impact, many CSR initiatives also focus on environment-related issues. This has especially been the case in recent years in the backdrop of the climate crisis. Companies engaged in CSR are increasingly implementing eco-friendly practices at the workplace and promoting environmental sustainability. These environmental efforts align with the ‘E’ component of ESG, which is a metric to evaluate a company’s environmental actions.