The terms “sustainability” and “ESG” are now common in both the public and private equity markets. They are also becoming increasingly common in the bank lending and debt markets. Yet confusion remains about their meaning. Are these synonyms or different concepts? If the latter, what is the relationship between the two? The discussion can become quite heated with advocates of sustainability vociferously objecting when people use the term ESG to mean sustainability. In this view, ESG is less than sustainability. While I have sympathy with this view, I think it’s also important not to throw out the baby with the bathwater. As I’ve written, it wasn’t that long ago when neither term was common—nor even considered legitimate for value creation—in the investment community. So I’ll live with a little confusion while mainstream investors get comfortable with both ideas and learn the difference between the two.

The private equity firm Ambienta is a good example to help them get down the learning curve. Ambienta partner and ESG Manager Stefano Bacci summarizes it nicely: “Sustainability is what we do. ESG is how we do it.” What the firm is doing can provide some guidance for other PE firms. As Bacci elaborates, “Sustainability is the impact driven by the products and services of our portfolio companies. ESG is about how we manage these companies in a responsible way.”  The difference can be further illustrated with a hypothetical example. Consider a company that produces equipment that enables a shoe manufacturing company to make its products with minimal waste in leather used and in a highly efficient way in terms of energy and water usage. This is sustainability. Yet this same company could also be inefficient in its own manufacturing processes along with a high accident rate, have a large gender wage pay gap, poor working conditions, and little training. All resulting in a high turnover rate which simply exacerbates all of these problems. This is ESG.

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