CSR vs. ESG: Key Differences Explained

In today's business environment, the importance of Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) practices has grown considerably. Although both approaches aim to promote sustainable business practices, clarity is needed regarding the specific aspects that differentiate these two approaches. 

This persistent confusion has become a critical issue as companies face increasing expectations in terms of sustainability and responsibility. Understanding these differences is essential to guide business strategies and respond effectively to the demands of consumers, investors, and regulators in a rapidly changing world.

Let's take an in-depth look at Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) Frameworks, and explore the differences between these two concepts.

• What is CSR?
• From CSR to ESG
• What is ESG?
• CSR and ESG: Key Differences
• Why are CSR and ESG Crucial for Today’s Businesses?
• Getting Started with CSR and ESG

What is CSR? 

Brief history of CSR

Corporate Social Responsibility (CSR) has come a long way since Howard Bowen introduced it in the 1950s in his book, "Social Responsibilities of the Businessman." Bowen saw CSR as businesses having a duty to pursue policies that benefit society. The 1990s were a turning point for CSR, driven by globalisation and key international agreements like the UN Kyoto Protocol, which aimed to curb greenhouse gas emissions. Companies started tackling global issues, expanding their focus beyond local community impacts. Robert Edward Freeman's stakeholder theory also played a role, encouraging businesses to consider the interests of all stakeholders, including suppliers, employees, consumers, communities, and the environment.

By the early 2000s, CSR had become central to business strategies. Companies began using CSR to boost their reputations and gain a competitive edge. Changing consumer behaviour fueled this trend, with more people demanding ethical practices and environmental care. By 2022, Simon-Kucher & Partners found that 71% of consumers were changing their lifestyles to be more sustainable, and 66% considered sustainability a key factor in their purchasing decisions. As CSR grew in importance, many countries introduced laws requiring businesses to disclose social and environmental impacts. In essence, CSR is about integrating social and environmental considerations into business operations and stakeholder interactions. It represents a business model that ensures companies remain socially accountable to themselves, their stakeholders, and the broader community

Key Pillars of CSR

A company's Corporate Social Responsibility strategy focuses on several key areas, typically divided into four main categories:

Environmental Responsibility 

Companies committed to CSR increasingly engage in environmentally friendly practices by assessing and reducing their environmental footprint. This includes initiatives such as using renewable energy sources, minimising waste by creating recyclable packaging, and reducing greenhouse gas emissions by sourcing locally and using environmentally friendly means of transport.

Ethical Responsibility

Ethical responsibility enables companies to act with integrity, earn consumer trust, and foster a positive work environment. CSR encourages companies to respect ethical values, treat employees fairly, and ensure product safety, encompassing fair labour practices, non-discrimination policies, and supply chain transparency. 

Economic Responsibility

CSR encompasses more than just profits; it also considers how they are generated. Economic responsibility means making financial choices that prioritise sustainability. It also includes supporting economic development in the communities where companies operate by, for example, creating jobs, ensuring fair wages and healthcare benefits for employees, and establishing local partnerships.

Philanthropic Activities

Beyond financial performance, companies are expected to serve the community. By engaging in philanthropy, companies strengthen relationships with communities and demonstrate their commitment to social well-being. This may involve donating money, resources, or employee time to support local charities, educational programmes or disaster relief operations.

Ultimately, CSR is about integrating sustainable practices into business models and positively impacting society. Although this approach is currently voluntary, companies can follow various international standards and guidelines to guide their efforts. These include the United Nations Global Compact , the Global Reporting initiative and ISO 26000, which provide frameworks for effective CSR management and reporting.

From CSR to ESG

The transition towards ESG represents a natural evolution of CSR, incorporating more measurable and standardised criteria for evaluating company performance. While CSR was often seen as voluntary and qualitative, ESG introduces a more rigorous and quantifiable approach. Investors use ESG criteria to assess the risks and opportunities linked to companies' sustainable practices.

Regulated industries have adopted ESG due to regulatory encouragement. The global ESG framework is now replacing CSR, emphasising broader impacts. This shift moves responsible business practices from a focus on reputation to a strategic approach aimed at long-term success, financial rewards, and market differentiation. 

What is ESG? 

The Rise of ESG

Environmental, Social, and Governance (ESG) has evolved a lot since its roots in the CSR movement of the 1950s. By the 1970s, investors started aligning their portfolios with personal values, not just financial goals, giving rise to socially responsible investment. This trend gained traction in the 1980s as environmental and social awareness grew. The 1990s were pivotal for ESG, as the Global Reporting Initiative (GRI) and the UN Global Compact, set up frameworks for corporate sustainability and responsibility. The term "ESG" itself was clearly defined in a 2004 UN report emphasising the importance of environmental, social, and governance factors in investment decisions. 

Throughout the 2010s, ESG standards gained global traction, further supported by the Paris Agreement, the UN Sustainable Development Goals (SDGs) and several key organisations. 

Today, ESG considerations are crucial to corporate strategy and investment decisions. Frameworks such as GRI, CDP, SASB, and TCFD, now widely adopted, ensure transparency and accountability. New regulations, like the EU's Corporate Sustainability Reporting Directive (CSRD), require large companies to report on their social and environmental impacts. This highlights the importance of ESG in fostering sustainable business practices and meeting stakeholder demands for ethical corporate behaviour. Consequently, ESG has become essential in shaping the future of business and investment, promoting a more sustainable and equitable world.

Key Pillars of ESG

ESG, which stands for Environment, Social and Governance, refers to the three key factors used to measure a company’s sustainability and ethical impact. The underlying goal is to gather information about the non-financial risks and opportunities of the company.

ESG is divided into 3 pillars, as summarised below. 

• Environment: This dimension assesses how a company takes responsible actions to preserve the environment. This includes paying attention to its impact on climate change, resource use, energy efficiency, waste and pollution management, and biodiversity conservation.
• Social: This area focuses on how a company manages its relationships with its employees, suppliers, customers, and the communities in which it operates. Thus, it involves factors such as diversity and inclusion, human rights, labour standards, health and safety, and community relations.
• Governance: This final component assesses the leadership, policies and structures that guide a company's actions. It covers, among others, executive remuneration, board diversity and structure, business ethics, compliance, risk management, and shareholder rights.
  
  

From ESG to ESG Reporting

In response to significant transparency issues hindering investors' ability to compare companies' sustainability, highlighted by the rising interest in sustainable investments, EU officials developed a regulatory framework under the EU Green Deal. 

ESG standards, such as the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, and the Sustainable Finance Disclosure Regulation (SFDR), were then created to regulate how companies disclose non-financial information crucial for investment decisions. These standards intend to fight against greenwashing by providing investors and stakeholders with reliable and comparable ESG data. 

‘ESG Reporting’ refers to the process of complying with such standards by making organisations disclose information about their impact on society, the environment, and their governance bodies

CSR and ESG: Key Differences

CSR and ESG practices, while similar in their aim to promote sustainable business practices, differ considerably in their implementation, focus, and audience. Let’s dive into these differences.

Purpose

One of the key differences is that CSR goes beyond simple measurement to include accountability and the actions taken to remedy the impacts identified by the company, while ESG reporting focuses on monitoring and measuring the impact of a company's activities on the environment, society and governance.

In other words, CSR encompasses the strategies, initiatives and policies that companies implement to actively contribute to achieving social and environmental goals, by demonstrating how they integrate responsible practices into their core business and culture. While ESG reporting aims to quantify the data and ensure the transparency of parameters relating to sustainability, diversity and ethical governance.

Voluntary Commitment vs. Regulatory Compliance

On one side, CSR is a company's voluntary commitment to act ethically and responsibly, concentrating on the wider impact on society, the environment, and stakeholders. CSR activities are driven by internal motivations and corporate values rather than regulatory requirements. 

ESG, on the other hand, follows mandatory regulations in various regions. Standardised regulations require companies to disclose information about their sustainable initiatives within their core business and to provide concrete, data-driven evidence, of their environmental, social and governance performance.

Reporting: Quantitative vs Qualitative data

CSR activities, while they may involve quantifiable objectives, are often more qualitative, aiming to engage employees and build a positive reputation for the company. On the other hand, ESG standards, such as the CSRD and EU Taxonomy, mandate companies to disclose information on up to 3,500+ ESG data points.

Data is at the heart of ESG, and high-quality quantitative and qualitative data is essential for credible ESG reporting. This data-centric approach helps companies build trust with stakeholders, particularly investors who rely on this information to make investment decisions. 

Implementation process

The implementation of CSR and ESG varies within a company. CSR initiatives, often led by dedicated teams, focus on community relations, philanthropy and employee engagement, and offer the flexibility to align with a company's unique values. These programmes are generally implemented within the framework of the company's culture, values and brand management. 

ESG, instead, requires an integrated approach across the organisation, integrating ESG strategies into the overall business plan and involving departments such as finance, operations, legal and compliance. Implementing ESG involves setting specialised data management systems, measurable targets, continuous monitoring and transparent reporting, making it a more comprehensive and systematic approach than CSR.

Standardisation of the reports

CSR results and reports are typically developed independently by each company, leading to variability and a lack of standardisation. In contrast, ESG reports generally comply with international frameworks, standards, and regulations, ensuring the comparability and reliability of data.

Ultimately, although the two concepts differ, CSR and ESG can coexist within a company and complement each other. CSR initiatives help communicate a company's commitment to sustainable development and enhance its reputation as a responsible business. Meanwhile, ESG provides measurable objectives and precise assessments required by investors and regulators. This dual approach enables companies to engage stakeholders meaningfully while meeting the growing demand for transparency and accountability in sustainability practices.

Why are CSR and ESG Crucial for Today’s Businesses?

The significance of ESG and CSR practices has grown immensely over the last few years. These frameworks are no longer just supplementary; they are essential for companies’ sustained success and competitiveness. Let’s dive into the six main reasons why that is.

Growing Social Awareness

Consumers, investors, and other stakeholders now expect businesses to operate responsibly and transparently. For instance, Patagonia’s steadfast commitment to environmental and social responsibility has earned it customer loyalty and a competitive edge. Companies failing to meet these rising expectations risk losing trust and facing significant challenges in financing, sales, and recruitment.

Brand Reputation

CSR provides a platform for positive brand reputation through media coverage, partnerships, and employee advocacy. Companies with strong CSR programmes often enjoy greater brand loyalty and public perception, which can lead to rewards and recognition, strengthening their position in the market. 

This is confirmed by Belinda Dapi and Maxwell Agabu Phiri's survey on the impact of CSR on brand loyalty, which found that 59.7% of respondents believed that a company's CSR initiatives, if they knew about them, would contribute to their brand loyalty. 

Combat Greenwashing through robust CSR and ESG strategies. 

Corporate social responsibility and ESG reporting requires organisations to account for their impact on the community and the environment. However, many companies practise "greenwashing", i.e. deceptively promoting their environmental efforts in order to improve their image. This short-term strategy often backfires, as consumers increasingly reject companies involved in such scandals.

Notable examples of greenwashing include the cases of Shell, Volkswagen and Amazon, which have faced backlash and legal consequences for insincere environmental practices.

Strong CSR and ESG strategies combat greenwashing by promoting effective accountability and transparency. A real commitment to sustainable development builds consumer and stakeholder trust, which translates into long-term benefits such as greater brand loyalty and improved profitability. 

Regulatory Requirements

Sustainability reporting has transitioned from a voluntary act to a regulatory necessity in many regions. Governments mandate businesses to provide comprehensive insights into their social and environmental actions. Non-compliance can lead to severe penalties and damage a company’s reputation, impacting investor relations and market trust. 

For example, under current legislation in France, company directors can be fined up to €75,000 and imprisoned for up to five years if they fail to comply with the CSRD. Proper ESG reporting is crucial for transparency and regulatory adherence.

Financial Benefits

Implementing transparent ESG reporting and enhancing the company’s sustainability based on the findings yield tangible financial benefits:

• Access to capital: Financial institutions offer more attractive loan terms to transparent companies engaged in sustainable actions.
• Customer Loyalty: Consumers increasingly support brands that act transparently and responsibly, translating into stable revenues and profits.
• Risk Reduction: Effective ESG management helps identify and mitigate risks, such as environmental issues or labour violations, avoiding costly crises and sanctions.
• Market Value Increase: Companies with high ESG standards generally perform better in capital markets and have higher market values.
• Cost Reduction: Investments in energy efficiency and sustainable resource management can result in substantial long-term savings.

Investor and Partner Assurance

Businesses with robust ESG practices are attractive to investors and partners looking for long-term sustainability. ESG reporting demonstrates a company’s commitment to ethical operations, risk management, and long-term planning, building trust and strengthening relationships with stakeholders.

Corporate Culture and Employee Engagement

CSR enhances company culture by promoting inclusivity and social good, which boosts employee morale and retention. A strong CSR strategy aligns with employees' personal values, fostering a positive work environment and increasing productivity. This, in turn, attracts top talent and reduces turnover rates.

Getting Started with CSR and ESG

Ultimately, the Corporate Social Responsibility (CSR) and Environment, Social and Governance (ESG) frameworks have become crucial to modern business. Understanding the distinctions between these two concepts is essential as companies seek to meet the growing demands of sustainability and responsibility.

Together, CSR and ESG empower companies to engage stakeholders meaningfully, ensuring sustainable success and competitive advantage in today's marketplace. Embracing both frameworks enables companies to meet regulatory requirements, build trust, and foster a responsible and sustainable corporate culture.

Looking to get started on your CSR/ESG strategy? Teaming up with sustainability specialists like Greenomy offers invaluable insights and assistance, ensuring that your organisation not only meets regulatory demands but also harnesses your sustainability reporting as a strategic resource. Leverage Greenomy’s Advisory services for comprehensive guidance, from assessing your CSR/ESG maturity to generating the final report.