Organizational Change
Purpose & ESG Are Not Interchangeable; You Need Both

Consumers, employees, investors and other stakeholders increasingly expect companies to adopt both a corporate Purpose and robust ESG (environmental, social and governance) or sustainability practices.

Aside from these expanding expectations, we need the business sector to play a major role in order to meaningfully address the enormous, complex challenges facing the world.

Without the private sector’s financial investment, networks and influence, we simply won’t .
However, in the effort to redefine the role of business in society, Purpose and ESG are sometimes competing for attention. It’s not always clear which should be considered first, how the two interrelate, or how they are different.

Often, the two are either discussed in isolation or conflated, leading to confusion at best and dismissal at worst.

If we have any hope of achieving the United Nations’ 17 Sustainable Development Goals, the last thing we want is for business leaders to be lost in a sea of meaningless jargon.

I reached out to three industry experts to explain the relationship between corporate Purpose and ESG, and how best to prioritize and embed them within the organization:

• Nikhil Bumb — Director at FSG and co-author of The Economist’s “Beyond Trade-Offs” series

• Coro Strandberg — advisor to the United Way Social Purpose Institute and President of Strandberg Consulting

• Phil Preston — founder of The Business Purpose Project in Australia and author of the book, Connecting Profit with Purpose

Which comes first, Purpose or ESG?

Article after article tells businesses to use their Purpose to guide their core strategy.

But focusing on Purpose alone risks ignoring critical ESG commitments that fall outside a company’s Purpose.

Take, for example, a company whose Purpose is to reduce global emissions through wind energy. Does this mean they can ignore diversity and inclusion among their staff, or waste and pollution in their supply chain?

On the other hand, businesses are told to improve diversity, equity and inclusion; build a resilient supply chain; and work towards net-zero emissions, among many other ESG-related goals.

But expecting organizations to do “all things sustainability” risks scattering their attention and diluting progress on their Purpose, let alone business performance. No wonder that, when I consult with business owners, I often hear feelings of overwhelm.

As one executive at a financial institution expressed to me recently, “Our customers want us to create an inclusive hiring strategy, boycott certain advertising platforms and use solar panels; all on top of having the best customer service, the best app and the best prices. How are we supposed to do it all?”

As a starting point, Bumb advises, “ESG focus should come from the company’s Purpose.”

That said, Strandberg reminds us that “good sustainability/ESG practices are table stakes for all business: Every business needs to understand its social and environmental risks and opportunities and address them.”

In other words, Purpose can illuminate which ESG areas to focus on; but some ESG commitments need to be a priority, even if they fall beyond the scope of the company’s Purpose.

Preston echoed this perspective: “You could argue that every company should be doing these things: They should be acting ethically, following all relevant codes of practice, and complying with legal and regulatory requirements — that’s just a core and basic requirement for being in business.”

Consensus: Purpose, as a company’s guiding North Star, should always come first when making strategic business decisions — including which ESG commitments to emphasize. Some ESG commitments, however, must be prioritized regardless of how they relate to Purpose.

How are they interrelated?

Many companies think about these concepts somewhat independently.

However, as Bumb says: “Leaders should make sure at least some of their ESG commitments are clearly linked to, and deliver on, the goals set by its Purpose.”

How are they interrelated? Some initiatives driving towards their ESG goals will simultaneously drive towards their Purpose, and vice versa. For example, a restaurant whose Purpose is to build community and inclusion might set a goal to improve their employees’ understanding of diversity through an educational initiative. This initiative would simultaneously work towards their Purpose and an ESG goal related to improving employee wellbeing or inclusion.

Finding the links between Purpose and ESG will, Bumb says, “enable smarter decision-making related to strategy, operations and people; and will help a company deliver on its Purpose and demonstrate performance on key ESG metrics.”

Indeed, setting goals and initiatives to achieve its Purpose will help a company build upon the robustness of its ESG strategy as well.

As Strandberg highlighted, “Adopting a social Purpose will elevate the importance of ESG to the organization.”

Remember that the scope of ESG commitments will be broader than those tied directly to their Purpose: “Corporate Purpose is likely to be oriented towards a small set of Sustainable Development Goals, while managing ESG factors will take into account a much broader range of concerns,” Preston says.

Let’s return to the company with a Purpose of reducing global emissions through wind energy — which gives it a clear focus for the majority of its business operations and activities. Its strategy to achieve this Purpose might include things such as developing wind farms. But it would be entirely prudent for its ESG commitments to include biodiversity conservation, to reduce the potential harms created by the pursuit of its Purpose.

Driving towards its company Purpose with consideration of the most relevant ESG factors will help ensure the long-term value of the company and its societal impact.

Consensus: Purpose and ESG strategies are both critical to becoming a thriving, resilient business that benefits, rather than harms, society.

How are they different?

Purpose and ESG are clearly related. Sometimes the initiatives associated with each will even overlap. But it’s important to be aware of their differences as well.

Preston offers a clear distinction: “While corporate Purpose is about joint value creation between business and society, ESG is more about managing downside risk — an examination of whether the company is doing the right things from a brand and reputation perspective to keep key stakeholders on side.”

Again, some initiatives might simultaneously do both. Returning to the restaurant focused on community and inclusion, its educational initiatives have the potential to create a positive impact while simultaneously reducing reputational risks for the business.

Finally, Bumb pointed out one other key distinction: “ESG commitments will evolve over time, whereas a company’s Purpose should endure.”

Consensus: Purpose is about creating societal impact, whereas ESG is focused on reducing risks to the business.

How to prioritize initiatives aimed at Purpose and ESG goals

Even with the understanding we’ve now gained around these terms, there is such a wide range of ESG activities for a company to consider; alongside impact initiatives aimed at achieving their Purpose, how can companies possibly prioritize them?

Essentially, each potential priority can be screened against two key questions:

1. Does prioritizing this help us achieve the societal impact reflected in our Purpose? (Impact focus)

2. If not, does prioritizing this help us reduce risks to our business? (Risk-reduction focus)

The degree to which a company can say ‘yes’ to at least one of these questions will bring the most important priorities to the top.

Consensus: Ultimately, a company should have priorities that fall into each of these two buckets and be sure to cover key ESG commitments expected of all companies, including reducing your carbon footprint, and improving employee health and safety.

Integrating Purpose and ESG is necessary for every business in this new era. While integration is no small feat, companies must have a clear understanding of how ESG and Purpose relate and how they’re different.

With the input from these Purpose and ESG experts, we hope you feel more confident to take on the challenge.