In today's business world, we increasingly encounter the terms SDG and ESG. Although both relate to actions for the environment, society, and corporate governance, they differ in scope and application in business practice.
What is ESG, how does it affect business and what risks does it pose, what are the differences between ESG and SDG, and how can they complement each other.
SDGs – Sustainable Development Goals concentrates on United Nations 17 long-term goals such as climate action, social security or economic growth, while ESG focuses on specific assessment criteria that can affect a company's financial performance. Understanding these differences allows investors to better assess the risks and growth of the business.
The SDGs and ESG factors are closely related as many of the SDGs can be achieved through ESG practices. Currently we can observe a growing need for ESG related investments. More and more modern companies and investors are looking to invest or cooperate with companies that advanced in this matter, can show their commitment to sustainability and responsible business practices. This is predominantly due to a number of factors, including the increasing awareness of the environmental and social impact of businesses, the growing demand for sustainable products and services, and the regulatory pressure on companies to improve their ESG performance. Those criteria are becoming a key tool in the context of legal regulations, emphasizing the growing responsibility of companies for their impact on the environment and the need to operate in a sustainable manner.
It needs to be noted that, not only investors but also customers have a significant impact on ESG criteria increased importance. Companies recognize the need to adapt their strategies to consumer expectations, which can lead to long-term benefits for both themselves and society as a whole. In this way, ESG becomes not only an assessment tool, but also an important element of a development strategy consistent with the idea of sustainable development.
There is of course risk associated with proper implementation of ESG. If poorly managed it can result in legal penalties, fines, and loss of trust among customers, employees, and investors. Poor risk management can lead to serious crises. Therefore, companies should actively manage ESG risk to protect their reputation, ensure long-term stability, and fulfil their obligations to stakeholders. Effective ESG risk management can contribute to creating a more resilient, sustainable, and ethical business.
To summarise it, the SDGs and ESG criteria are complementary approaches, parallel application of both approaches creates a synergy effect. The SDGs, as a set of global ambitious goals, whereas ESG provides tools and indicators that enable companies to monitor and report on their progress in achieving these goals.