#003 History of ESG
Unfolding the Green Tapestry: A Comprehensive Journey Through the History of ESG
I. Introduction
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk). The importance of ESG in today's world cannot be overstated. As we face a myriad of global challenges, from climate change to social inequality, businesses are increasingly expected to play their part in creating a more sustainable and equitable world. ESG principles provide a framework for businesses to navigate these challenges and contribute positively to society, while also delivering value to their shareholders(1).
II. The Genesis of ESG and Early Stages of ESG Investing
The concept of ESG investing has deep roots, with early instances of ESG-like considerations dating back centuries. Religious codes, for instance, banned investments in slave labor. In modern times, socially responsible investing (SRI) emerged in the 1960s and '70s. The movement was sparked by divestments from South Africa, which were advocated to protest the country's system of apartheid.
In 1971, two United Methodist ministers opposed to the Vietnam War created the Pax World Fund, the first publicly available mutual fund in the U.S. that factored social and environmental criteria into investment decisions. These early instances of socially responsible investing strategies laid the foundation for what would later become ESG investing.
III. Evolution of ESG Over the Years and The Rise of ESG Investing
Over the last 35 years, various major events, trends, actions, and milestones have shaped the contemporary ESG landscape.
1990: Domini 400 Social Index
Amy Domini, the managing director of KLD Research and Analytics, developed the Domini 400 Social Index, which focuses on firms that prioritise social and environmental responsibility. Including social and environmental problems among commercial goals was considered a bad bet for investors at the time.
To test the waters, Domini established the Domini Social Impact Equity Fund the next year. By 2001, the fund had raised $1.3 billion and had returned 15.08% vs 15.25% for the S&P 500, indicating that investment in socially responsible problems may bring high financial returns
1992: United Nations Framework Convention on Climate Change
At the Rio de Janeiro Earth Summit, 154 countries ratified a commitment to reduce "dangerous human interference with the climate system." The pact mandated study and continued discussions, laying the groundwork for future policy agreements. It also established the Conference of the Parties (COP) as an annual conference of participants to work out specifics and adjust aims. This move helped galvanize worldwide efforts to prevent temperature rises caused by human greenhouse gas emissions, with intentions to cap and reduce them over time.
1995: The United States' first sustainable investment inventory
The Social Investment Forum Foundation, established in Washington, D.C., and now known as the U.S. SIF Foundation, conducted the first inventory of the overall magnitude of sustainable investments, indicating a total of $639 billion in assets handled in the United States. According to the Global Sustainable Investment Alliance, there will be $35.3 trillion in sustainable assets worldwide by 2020.
Meanwhile, the December 2022 report from the US SIF identified $8.4 trillion in ESG and sustainable assets in the US. This was reduced from $17.1 trillion in 2020 due to a decision to exclude investors that do not offer clear information on the ESG standards they adhere to. However, according to the US SIF, the $8.4 trillion represents 12.6% of all professionally managed investment assets in the US.
1997: Kyoto Protocol
The Kyoto Protocol was signed in 1997 and came into effect in 2005. An agreement to set precise greenhouse gas reduction objectives was finally accepted by 192 nations, with 36 signing up for the first commitment period. Although all 36 nations satisfied their requirements, nine of them were required to support climate reduction programs in other countries due to exceeding their objectives.
China and the United States, the two greatest polluters, were also missing. China established no binding objectives, and the United States never ratified the deal. Canada initially joined but withdrew in 2012 after realising it would be required to pay $14 billion in fines for failing to meet objectives.
1997: Launch of the Global Reporting Initiative
The Global Reporting Initiative (GRI) was established to address environmental problems. The committee broadened its scope to include social and governance problems. It changed from advising to ratifying the first worldwide standards for sustainability reporting in 2016.
2000: Global Compact of the United Nations
The Global Compact of the United Nations outlines standards in a variety of sectors, including human rights, labour, the environment, and anti-corruption. More than 13,000 business and government entities from 170 countries are involved.
The aims, presented as a forum rather than a rule, are purposefully ambiguous in order to generate conversations, agreements, and other actions through dialogue-specific projects. According to a KPMG poll, 78% of the world's biggest 250 corporations will apply the GRI criteria by 2022. More than 20,000 stakeholders are now involved.
2000: Carbon Disclosure Project
Paul Dickinson co-founded the Carbon Disclosure Project (CDP) to organise and empower significant investors to request that firms publish on their climate performance and risk mitigation strategies. To assist normalise climate reporting, 35 investors demanded climate disclosures from the 500 biggest corporations in 2002.
The effort aided the Task Force on Climate-Related Financial Disclosures, which contacted over 8,000 businesses. Companies with 64% of market capitalization replied with climate statements by 2021. The organisation broadened its efforts to increase water security and minimise deforestation. By 2023, CDP would have represented investors with over $136 trillion in assets.
2004: First "Who Cares Wins" report published with the term?ESG
At the request of the United Nations, a consortium of banks and other investment businesses compiled a study titled "Who Cares Wins," which popularised the term ESG. The research included various recommendations for incorporating ESG problems into analysis, asset management, and securities brokerages. The organisation claimed that incorporating ESG concerns into investing decisions will lead to more stable and predictable markets. From 2005 through 2008, four further reports were released.
2005: Freshfields report
With UN sponsorship, the London-based law firm Freshfields Bruckhaus Deringer released "A legal framework for impact: Sustainability impact in investor decision-making." According to the research, financial trustees should consider environmental and social factors when evaluating firms. This plan has evolved over time into investing in sustainability impact (IFSI)
2006: Principles for Responsible Investment
A group of 70 investing and environmental professionals produced six principles at the request of the United Nations, urging institutional investors to include ESG issues into their choices. The principles encourage investors to consider ESG concerns, become active owners, seek appropriate disclosures, promote acceptance of ESG analysis, improve effectiveness in resolving ESG issues, and report on actions and progress.
2007: Climate Disclosure Standards Board
Many of the main climate-related organisations banded together to form the Climate Disclosure Standards Board (CDSB). The new group developed a reporting system that enlarged on the effects of climate change on an organization's strategies, financial performance, and condition. It eventually incorporated factors for water security and forest issues.
The CDSB now provides a framework to harmonise reporting on greenhouse gas emissions and natural capital. It contributes to attempts to exchange data formatted using the Extensible Business Reporting Language and the Climate Change Reporting Framework.
2011: Sustainability Accounting Standards Board
Jean Rogers established the Sustainability Accounting Rules Board to develop relevant accounting rules that represent the impact of environmental, social, and governance (ESG) concerns on the bottom line of corporations in a certain industry. For example, beverage firms would have to account for water security, whereas sustainable energy companies would have to account for the environmental effect of mining operations that manufacture their equipment.
These standards seek to give the same uniformity in reporting on the risks and possibilities associated with fulfilling sustainability targets as traditional accounting indicators do in valuing investment choices. The organisation went on to create standards for 77 industries in 11 different areas.
2015: U.N. Sustainable Development Goals
The United Nations General Assembly established 17 Sustainable Development Goals (SDGs). A few years later, the SDGs were further defined with 169 specific objectives and 232 distinct measures of progress. Poverty, food security, health, equality, water, clean energy, work, infrastructure, sustainability, climate, oceans, ecosystems, justice, and collaboration are among the topics addressed.
2015: Taskforce on Climate-related Financial Disclosures
The Financial Stability Board (FSB), an industry consortium that gives recommendations on different risks, established the Taskforce on Climate-related Financial Disclosures (TCFD). The new committee is now working on reporting guidelines for climate-related disclosures for banks, enterprises, and investors. It assists in calculating the possible impact of climate hazards on a company's bottom line. More than 3,800 businesses have endorsed the TCFD guidelines.
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2016: Initiative for Workforce Disclosure
ShareAction, a charity that promotes ethical investing, has established the Workforce Disclosure Initiative. The program's goal is to improve the value and quality of worker health, safety, and risk management indicators. Currently, 68 institutional investors with more than $10 trillion in assets under control support the programme.
Four primary influencers yield a successful ESG initiative
2017: The Responsive and Responsible Leadership Compact
At the World Economic Forum (WEF) summit in Davos, Switzerland, more than 140 CEOs signed The Compact for Responsive and Responsible Leadership. The CEOs agreed to work together on the UN's SDGs to benefit both their firms and the globe. One of the compact's key principles is that "society is best served by corporations that have aligned their goals to serve the long-term goals of society.”
2017: State Street Global Advisors and board diversity difficulties
In connection with the unveiling of its "Fearless Girl" statue on Wall Street, asset management firm State Street Global Advisors informed 600 firms in the United States, United Kingdom, and Australia that it will vote against the chairs of boards that do not have any female directors or candidates. In only a few months, 42 corporations pledged to increase diversity, with seven of them adding female board members. Later, Global Advisors voted against 400 corporations for failing to undertake diversity measures.
2019: Davos Manifesto 2020
The World Economic Forum (WEF) issues the Davos Manifesto 2020 as a set of ethical standards to lead businesses through the Fourth Industrial Revolution. The manifesto emphasised the importance of firms serving their workers, customers, suppliers, stakeholders, local communities, and society. The emphasis was on businesses treating people with dignity and respect, including human rights into the supply chain, paying their fair share of taxes, and fulfilling ESG goals.
20: COVID-19 pandemic and other events
The COVID-19 epidemic drove millions of employees to work from home, demonstrating how an unknown threat may disrupt the global economy and people's well-being. Businesses struggled to adapt to new operational realities.
Meanwhile, legions of distant employees had more time to respond to natural calamities such as high heat, forest fires, floods, and storms. The maltreatment and death of George Floyd while in police custody, which resulted in a second-degree murder conviction, fueled racism fears.
According to J.P. Morgan's survey, 71% of respondents believe a pandemic would "increase awareness and actions globally to tackle high-impact/high-probability risks such as those related to climate change and biodiversity losses."
2020: Standardised metrics for stakeholder capitalism
The World Economic Forum and the Big Four accounting firms published a whitepaper that standardises parameters for corporations reporting on their ESG development. The measures aided in aligning ESG indicator reporting with SDG progress. More than 50 firms have integrated these measures into their reports since their debut, and 90 more have committed to doing so.
2021: The European Union's Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation of the European Union imposed requirements on describing funds with specific sustainable investment objectives that promote environmental or social characteristics and those that are not. The guidelines established Principal Adverse Impact, which characterises the negative effects of investments on sustainability goals. By 2023, funding that support sustainability must report on water resource protection, shifting to a circular economy, pollution management, and biodiversity restoration.
2022: Tesla ejected from S&P Sustainability Index
Tesla CEO Elon Musk has long been recognised for his environmental sensitivity, and he has revolutionised the auto industry and dominated the market for electric vehicles. Tesla was removed from the S&P 500 ESG Index about a month after Musk launched talks to buy Twitter owing to a "rebalance" and a "decline in criteria level scores" for a lack of "low carbon energy and codes of business conduct." [W]hile Tesla's S&P DJI ESG Score has remained relatively stable year over year, it has been pushed further down the ranks relative to its global industry group peers," wrote Margaret Dorn, senior director and head of ESG Indices in North America at S&P Dow Jones Indices, in her May 17, 2022.
Other reasons for removal from the index included allegations of racial discrimination and poor working conditions at one of the company's factories, as well as Tesla's handling of a National Highway Traffic Safety Administration investigation into 17 injuries and one death linked to crashes involving the company's Autopilot feature.
2022: Consolidation of sustainability standards
Except for the United States, the International Financial Reporting Standards (IFRS) Foundation has maintained accounting standards for the majority of countries. The Value Reporting Foundation (VRF), which handled the Sustainable Accounting Standards Board standards, merged with the International Financial Reporting Standards (IFRS) to become the International Sustainability Standards Board. Except in the United States, the IFRS merged the VRF and the Climate Disclosure Standards Board, producing a worldwide basis for sustainability reporting.
The Financial Accounting Standards Board is in charge of the US Generally Accepted Accounting Principles. The SEC proposed new regulations mandating "registrants to provide certain climate-related information in their registration statements and annual reports."
2023: EU's Corporate Sustainability Reporting Directive
According to a new European Union rule, EU corporations and non-EU enterprises operating in the EU will soon be compelled to provide corporate sustainability disclosures about their alignment with an EU ESG-related taxonomy and to audit sustainability data. These reports should include information on environmental and socioeconomic issues, human rights, anti-corruption, and diversity. This information must be included in 2024 year-end reports due in 2025 by enterprises with more than 250 workers, €40 million in annual sales, and €20 million in total assets.
2023: ESG investment becomes a political issue in the United States in 2023
The United States Congress passed a joint resolution to rescind a Department of Labour final rule issued in 2022 that allows retirement fund managers to consider ESG metrics in investment decisions. President Biden vetoed the bill, keeping the regulation in place. An ideological war is raging between nations that have embraced ESG-focused investing and those that want to avoid it. Investors may bet on higher returns from ESG investments that take advantage of climate-related incentives under the Inflation Reduction Act.
IV. ESG Today: Current Practices and Trends
Today, ESG standards are becoming a significant force for investment decisions, corporate strategy, and the global economy. Companies are starting to view ESG more holistically, thinking beyond sustainability in an environmental sense. Transparency has also become a key element of ESG strategies, with companies expected to communicate their processes and set clear targets.
The scrutiny on ESG strategies has increased, driven by key stakeholders, particularly investors, who want to see interim targets and past performance against goals. They are also looking for large commitments, especially when it comes to mitigating climate change and setting net-zero carbon targets.
V. The Future of ESG
The future of ESG is predicted to continue expanding beyond climate risks and into social issues. As the concept of ESG evolves, so too does the scrutiny of strategies. The prospect of government regulation and mandated disclosure is driving companies to do more and communicate their processes.
The potential impact of these trends is significant. As ESG becomes more integrated into business strategies and investment decisions, it has the potential to drive a more sustainable and equitable global economy.
VI. Conclusion
The journey through the history of ESG reveals a dynamic and evolving field. From its early roots in religious codes and socially responsible investing, ESG has grown into a significant force in the business world. Today, ESG principles guide investment decisions, shape corporate strategies, and influence global economic trends.
Understanding the history of ESG is crucial as it provides context for its current practices and future trends. As we look ahead, the importance of ESG is likely to continue growing, driven by increasing societal expectations, regulatory pressures, and the recognition that businesses have a critical role to play in addressing global challenges.
The journey of ESG is far from over. As we continue to navigate the complexities of the 21st century, the principles of Environmental, Social, and Governance will undoubtedly continue to evolve and shape the future of business and investment.
If you read the article until now, we want to reiterate our commitment as a group of passionate experts dedicated to sustainable development and the pursuit of Environmental, Social, and Governance (ESG) advancements. Our fervor lies in leveraging these strategies to bring about significant, tangible change to our world. But our journey doesn't end here; it's just the beginning. If you find this subject as exciting and crucial as we do, we'd love to hear from you. Engage with us, share your thoughts and perspectives, or even suggest new ESG-related topics that you would like us to explore. Together, we can pave the way towards a more sustainable and equitable future. Your interaction is more than just participation—it's a contribution to a better world. Let's get this conversation started
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