50 Shades of Green: Navigating the

nuances of ESG and Sustainability

Quentin Fouesnant
February 28, 2023
 50 Shades of Green:
Navigating the nuances of ESG and Sustainability

1. Introduction
What is ESG ? What is ESG investing ?

I get those questions frequently from friends and family that read about those terms in the press.
I remember the first time I asked myself that same question. At the time, a simple google search
pointed towards an answer along the lines of “it is doing well by doing good”. After spending a
couple years working with those concepts, I find it even more difficult to answer those questions
with a singular definition of ESG.

Most recently, DeSantis’ crusade against ESG in Florida [1] has shown me that I am not alone in
the boat of ESG confusion. His description of ESG as a concept used to drive an ideological
agenda felt very distant from the definitions I would encounter in my daily work. The
Sustainability and ESG misunderstanding has become a regular occurrence for anyone involved
in that space and it became extremely worrying for me to see so many people using the same
words to name a myriad of different things.

The purpose of this article is to shed some light on the many different intentions that lie behind
the use of “ESG” or “Sustainability”. It does not intend to provide a ruling on what is right or
wrong when defining those terms, but to give its readers the ability to discern the different
motives that lead to their use.

2. Starting with ESG

ESG, Sustainability, Impact, Responsible Investments. These terms are often used
interchangeably, but they refer to a variety of approaches that use non-financial data in the
investment process. One of the most common, ESG stands for Environmental, Social &
Governance.

A starting point to understand ESG is that it is used as a lens through which you look at
companies and investments. It helps to categorize things such as risks, opportunities, metrics or
even disclosures.

For instance, if one were to look at ESG risks that can have a financial impact on a company,
they would categorize those into the three buckets. In the Environmental category, they may
want to consider the risk of sea-level rise that could affect physical assets located on the coast.

The variety of risks, opportunities and metrics that fall under the ESG umbrella is extremely
broad. This is why organizations like the Global Reporting Initiative or the Sustainability
Accounting Standards Board have developed standards that help reference the themes and
indicators that need to be considered under those three pillars.

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As each of those categories might not be equally relevant for companies, people use the
concept of materiality as a means to filter and prioritize them. The concept of materiality is
closely linked to the intent of the observer. For instance, a stakeholder that wants to focus on
financial materiality will look for risks & opportunities that have a significant importance in the
financial results. Another one that wants to understand a company’s externalities, will filter and
prioritize those based on the magnitude of environmental or social impacts.

Illustration of ESG Factors

Source: CFA Institute [2]

3. ESG in Corporate Risk Management

But why is ESG getting so much traction ? Why do people look at ESG data in the first place ?

This is where we will start to elaborate on one of the possible intents: corporate risk
management. Companies are exposed to a multitude of risks that can go from changes in
policies, to disruption from new competitors. Managing those risks adequately has been a best
practice long before anybody jumped on the ESG bandwagon. Noco and Stulz (2006)
established that companies should design their Enterprise Risk Management based on their risk
appetite in order to create value for shareholders.

The past 20 years have seen a rising focus on risks that could be classified as ESG. As climate
change has become top of mind, many stakeholders including regulators, investors and
companies are trying to understand its financial implications. This movement led to the creation
of the TaskForce on Climate-related Financial Disclosures (TCFD), whose purpose is to
“improve and increase reporting of climate-related financial information.”[3]

Litigation risk is commonly used as an example to justify the need for proper ESG risk
management in a corporate setting. The Deepwater Horizon oil spill resulted in a record
settlement of USD 20 billion between BP and U.S. authorities.[4] The magnitude of the
consequences combined with the likelihood of those risks to materialize, have made ESG risk
management a must have for any corporation.

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Just like there are massive risks arising in the environmental or social categories, huge
opportunities have appeared as well. As evidenced in the Sustainability & Consumer Behavior
2022 [5] report by Deloitte UK, there is a sharp increase in the number of consumers that are
opting for more sustainable products and services. This is leading a growing number of
companies to transition to offerings that appear as more sustainable, in order to gain a
competitive edge.

ESG factors being relevant to a company’s value creation and financials is one of the key
reasons that they are paying attention to them.

4. The Investor Perspective

While ESG risks and opportunities are important to a company, can they help generate better
returns for investors ? We are now delving into the controversial topic of ESG Investing.

As described by the Principles for Responsible Investment “Increasing amounts of industry and
academic research indicate that there is a relationship between ESG issues and financial
performance. PRI-commissioned research has also found that engaging with companies on
ESG issues can create value for the businesses and their investors by encouraging better risk
management and more sustainable practices.”[6]

For instance, Khan et al. (2005) concluded that “firms with strong ratings on material
sustainability issues have better future performance than firms with inferior ratings on the same
issues.” This is one of the key arguments for proponents of ESG integration in the decision of
capital allocation. It is also leading a number of companies to tie the executives’ compensation
to ESG metrics, as a reflection of their duty to maximize shareholder value.

However the stance in favor of ESG integration has not found unanimous approval. An ample
amount of research papers can be found arguing that leaders in ESG risk management do not
provide better returns to their investors. For instance, Hartzmark and Sussman (2019) stated
that “We do not find evidence supporting a rational belief that more sustainable funds perform
better, instead the evidence is more consistent with the opposite.” Similarly, Cornell and
Damodaran (2020) concluded that there is only weak evidence that investors can generate
excess returns with an ESG strategy.

It is important to note that looking through an ESG lens does not necessarily mean that you are
doing so for the greater good. Some academics and professionals alike have taken the stance
that the sole purpose of maximizing returns is enough to be considering ESG risks &
opportunities. Doing so might still result in positive outcomes, such as reducing an
organization’s carbon emissions due the risk of a carbon tax, but the main intent remains driven
by profits.

This has led to great confusion over the terms ESG Investing or ESG Funds, where it is not
always clear whether they are taking an ESG lens purely for the sake of maximizing returns or
for driving positive environmental and social outcomes. Some would even argue that the former
does not justify the use of an ESG label. In The End of ESG, Edmans (2023) argued that ESG

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should be seen as one of many long-term value drivers and not be given preferential treatment.
In his own words “considering long-term factors isn’t ESG investing; it’s investing”.

As described by the Principles for Responsible Investment, there are a number of other reasons
that investors are using an ESG lens such as Screening or Thematic Investing: “Screening
involves applying filters to a universe of securities, issuers, sectors or other financial instruments
to decide whether to consider them for investment. It is based on criteria, such as an investor’s
preferences or specific investment metrics, set out in an investment process or that reflect a
client or fund mandate. Screening can be positive, norms-based or negative.”[7]

Somefun et al. (2021) described “The goal of thematic investments is to provide the means to
invest in assets that have their returns significantly impacted by the structural changes
underlying the theme. Such changes come about through megatrends that shape societies:
Demographic shifts, social or attitudinal changes, environmental impact, resource scarcity,
economic imbalances, transfer of power, technological advances and regulatory or political
changes. An investment theme aims to transform one such megatrend into a relevant
investment opportunity.”

5. What about Sustainability ?

What is the difference between ESG and Sustainability ? This is another frequent question from
those trying to make sense of all the jargon.

A fairly popular definition comes from the World Commission on Environment and Development
(WCED). Sustainable development is defined as “development that meets the needs of the
present without compromising the ability of future generations to meet their own needs.” WCED
(1987)

In contrast, the recently formed International Sustainability Standards Board, revealed how
Sustainability will be defined as part of its upcoming standards:

“Sustainability will be described in the ISSB’s General Sustainability-related Disclosures

Standard (S1) as the ability for a company to sustainably maintain resources and relationships
with and manage its dependencies and impacts within its whole business ecosystem over the
short, medium and long term. Sustainability is a condition for a company to access over time the
resources and relationships needed (such as financial, human, and natural), ensuring their
proper preservation, development and regeneration, to achieve its goals.”[8]

Why would we have such different definitions for a similar concept ? Just looking at those two
already shows some stark differences in the way people are approaching this topic. While the
WCED is inferring a definition that looks at the needs of the population at a global level, the
ISSB takes an organization centric view of sustainability.

If we get back to basics, the Cambridge Dictionary describes Sustainability as “the quality of
being able to continue over a period of time”.[9] So the question becomes what do we want to
continue and for how long ?

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6. Planetary Boundaries & Doughnut Economics
What do we want to continue and for how long ?

The scientists at the Stockholm Resilience Centre have brought us a possible answer.
Rockström et al. (2009) taught us that “The relatively stable environment of the Holocene, the
current interglacial period that began about 10 000 years ago, allowed agriculture and complex
societies, including the present, to develop and flourish”

The last glacial cycle of 18O (an indicator of temperature) and selected events in human history.
The Holocene is the last 10 000 years. Adapted from Young and Steffen (2009).
Source: Rockström et al. (2009)

The study of the previous interglacial period, the Eemian, has shown that the average
temperature which was about 2 degrees higher than the Holocene was linked to water levels
about 4 to 6 meters higher. Steffen et al. (2011) reminded us that the Holocene state is the only
environment that we know of that can support our modern civilization.
The conclusion is that we need to sustain the state of our planet. If we are not able to do so, we
risk entering into a new era that will prove incompatible to our current way of life.
This work has been a core foundation of environmental sustainability, and scientists have
researched what are the Earth system processes that regulate its ability to remain in a
Holocene-like state. It resulted in the identification of nine planetary boundaries that define a
safe operating space for human civilization [10]:
- Stratospheric ozone depletion
- Loss of biosphere integrity (biodiversity loss and extinctions)
- Chemical pollution and the release of novel entities
- Climate Change
- Ocean acidification
- Freshwater consumption and the global hydrological cycle
- Land system change
- Nitrogen and phosphorus flows to the biosphere and oceans
- Atmospheric aerosol loading

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The concept of planetary boundaries was then extended by Ket Raworth to add the concept of a
social foundation under which can be found the dimensions of human deprivation. In her Oxfam
Discussion Paper, Raworth (2012) she described what is now referred as Doughnut Economics:
“The social foundation forms an inner boundary, below which are many dimensions of human
deprivation. The environmental ceiling forms an outer boundary, beyond which are many
dimensions of environmental degradation. Between the two boundaries lies an area – shaped
like a doughnut – which represents an environmentally safe and socially just space for humanity
to thrive in. It is also the space in which inclusive and sustainable economic development takes
place.”

Figure 1. A safe and just space for humanity to thrive in: a first illustration
Source: Oxfam. The 11 dimensions of the social foundation are illustrative and are based on
governments’ priorities for Rio+20. The nine dimensions of the environmental ceiling are based
on the planetary boundaries set out by Rockström et al. (2009b)
Source: Raworth (2012)

This gives us a new perspective on sustainable development, arguably more concrete than the
one developed by WECD in 1987. In this context, sustainability becomes the collective goal of
bringing our civilization into the safe space that lies between the environmental ceiling and the
social foundations.

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7. Planetary vs Business Scale
One of the key learnings from the work on planetary boundaries, is that the tipping points that
threaten our ability to maintain a Holocene-like state occur at a global scale. Sub-planetary
scale tipping points do exist and have the ability to cause an impact at the planetary scale if they
occur simultaneously in enough places.

This encourages us to think at a global level when we address issues such as climate change.
The quantification of planetary boundaries introduces the notion of threshold that must not be
crossed in order to avoid triggering tipping points. This is in line with the work of the IPCC that
has defined the notion of a Global Carbon Budget as “The maximum amount of cumulative net
global anthropogenic CO2 emissions that would result in limiting global warming to a given level
with a given probability.”[11]

The takeaway here is that the fight to respect our planet’s boundaries, including climate change,
is a team sport. Goals such as limiting Earth’s temperature rise apply to everyone and the
outcome on whether those goals are met will be equally universal. If we frame sustainable
development in the context of respecting planetary boundaries, one cannot build a sustainability
strategy solely at the company scale.

In fact even if we hear companies pledging to net zero on a daily basis, the concept of net zero
is only possible at a planetary scale. Assuming some of the companies manage to reach their
net zero target by 2050, the battle will be lost if those targets are not met at a global level. This
realization is important as a growing number of sustainability professionals are calling for a shift
in mindset. In their Opinion Paper titled “Maturation Pathways for Designing a Wellbeing
Economy” Ralph Thurm and Bill Baue (2021) examined various concepts and indices connected
to the idea of wellbeing. They elaborated that “At r3.0, we have long held the view that the
majority (if not all) of these indexes, schemes, and methodologies lack what’s absolutely
necessary to enable determination of true sustainability (and hence collective wellbeing):
thresholds and allocations.“

So when we think about the ability of an individual, a company or even a country to be

sustainable, it is more about its contribution to a global sustainability agenda.

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8. Conclusion: More Than Profits in the Balance
As we have seen thus far, there are many motives to look at a company of investment from the
ESG or Sustainability angle. In this non-exhaustive list, we can find:
- Corporate risk management
- Maximizing shareholder returns
- Stakeholder value creation
- Compliance with regulations
- Alignment with values
- Thematic investing
- Improving environmental and social impact
- Respecting planetary boundaries and social foundations

All of those are not mutually exclusive and many companies have more than one motive behind
their ESG or Sustainability strategy. It has become clear to me that the use of labels, like “ESG”,
“Responsible” or “Sustainable”, are not enough to reflect the nuances of a very diverse set of
agendas.

What seems critical at this point is that investors and companies provide clarity on the
terminology they use and do not settle for a simplistic labeling of their products.

Transparency is key to making sense of the ESG and Sustainability landscape. As mentioned
by Edmans (2023), “Companies should be up-front that they’re pursuing sacrificing shareholder
returns pursue ESG, and thus need a clear mandate from shareholders to do so. Investors may
be happy to give such a mandate – pension funds might rationally sacrifice a few basis points of
financial return to reduce a company’s carbon emissions, because pensioners care not only
about their income in retirement but the state of the planet.”

In many cases, the pursuit of a sustainability agenda might involve a sacrifice on financial
returns. Some businesses might manage to find alignment between purpose and profit but the
harsh reality is that damaging activities remain financially profitable as well.

Mindsets are shifting, and many prefer to see this sacrifice as delivering value to a different
stakeholder which could be the planet or society. In this dual pursuit of financial results and a
business model that can be compatible with doughnut economics, it is often hard to judge how
much each of them weigh in the balance of a company or an investor.

ESG and Sustainability will continue to take center stage in the near future but the confusion
over the interpretation of those creates a significant risk. As we try to navigate our way towards
a fair and equitable society that respects the limits of environmental resources, it will be
important to go beyond labels and discern whether the organizations around us are truly aiming
to solve the current crisis in a manner that aligns with scientific findings.

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References

Cornell, Bradford and Damodaran, Aswath, Valuing ESG: Doing Good or Sounding Good?
(March 20, 2020). NYU Stern School of Business, 22-23, Available at SSRN:
https://ssrn.com/abstract=3557432 or http://dx.doi.org/10.2139/ssrn.3557432

Edmans, Alex, The End of ESG (January 4, 2023). Financial Management, forthcoming, 1-11,
Available at SSRN: https://ssrn.com/abstract=4221990 or
http://dx.doi.org/10.2139/ssrn.4221990

Hartzmark, Samuel M. and Sussman, Abigail B., Do Investors Value Sustainability? A Natural
Experiment Examining Ranking and Fund Flows (March 25, 2019). European Corporate
Governance Institute (ECGI) - Finance Working Paper No. 565/2018, 35-36, Available at SSRN:
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Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First
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Nocco, Brian W. and Stulz, Rene M., Enterprise Risk Management: Theory and Practice (July
2006), 1 Available at SSRN: https://ssrn.com/abstract=921402 or
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Raworth, Kate, A safe and just space for humanity, Can we live within the doughnut? (February
2012)
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Rockström, J., W. Steffen, K. Noone, Å. Persson, F. S. Chapin, III, E. Lambin, T. M. Lenton, M.

Scheffer, C. Folke, H. Schellnhuber, B. Nykvist, C. A. De Wit, T. Hughes, S. van der Leeuw, H.
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[1] Sorkin, Andrew Ross and Giang, Vivian and Gandel, Stephen and Warner, Bernhard and J.
de la Merced, Michael and Hirsch Lauren and Livni, Ephrat (2022): “DeSantis Claims Win in
Campaign Against E.S.G.”, The New York Times

[2] Key ESG Factors, CFA Institute

[3] Task Force on Climate-related Financial Disclosures

[4] U.S. and Five Gulf States Reach Historic Settlement with BP to Resolve Civil Lawsuit Over
Deepwater Horizon Oil Spill, The United States Department of Justice

[5] Sustainability & Consumer Behavior 2022, Deloitte UK

[6] What is responsible investment?, Principle for Responsible Investment

[7] What is responsible investment?, Principle for Responsible Investment

[8] ISSB describes the concept of sustainability and its articulation with financial value creation,
and announces plans to advance work on natural ecosystems and just transition, International
Financial Reporting Standards

[9] Definition of “Sustainability”, Cambridge Dictionary

[10] The nine planetary boundaries, Stockholm Resilience Centre, Stockholm University

[11] Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the
Sixth Assessment Report of the Intergovernmental Panel on Climate Change, Annex VII
Glossary

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