The History of ESG: The Journey to Sustainable Investing

The term ESG, or environmental, social, and governance, is well known in the investor community. It refers to a set of metrics used to measure an organization’s environmental and social impact and has become increasingly important in investment decisions over the years. However, although the term ESG was first coined in 2004 in the United Nations Global Compact, the concept has been around for much longer.

The roots of responsible investment

In the 1970s, socially responsible investing (SRI) emerged as a way for investors to align their portfolios with their values. The movement gained momentum through divestment campaigns for companies doing business in South Africa during apartheid in the 1980s. Over time, SRI has steadily evolved to become very similar to today’s corporate social responsibility (CSR), focusing primarily on social issues such as human rights and supply chain ethics.

However, it was not until the 1990s that ESG considerations began to appear in mainstream investment strategies. In 1995, the Social Investment Forum (SIF) Foundation compiled a list of all sustainable investments in North America. The $639 billion total shows how shareholders are beginning to invest based on principle rather than pure profit.^One

Slowly but surely, institutional investors are beginning to recognize that companies can potentially improve their financial performance and risk management by focusing on ESG issues, such as greenhouse gas emissions. In response, asset managers have begun developing ESG strategies and metrics to measure the environmental and social impacts of their investments. In 1997, the Global Reporting Initiative (GRI) was founded to address environmental issues, but soon expanded its scope to also focus on social and governance issues.

In 1998, John Elkington published the following book: The triple bottom line of 21st century business: a cannibal with a fork.In , he introduced the concept of the Triple Bottom Line, a sustainability framework centered around the three Ps: People, Planet and Profit. Elkington’s goal was to highlight the growing number of non-financial considerations that should be included when evaluating a company. Elkington also hoped to persuade businesses to operate in the best interests of people and the planet. It is a wish shared by people all over the world.

ESG welcoming the new millennium

In 2000, the United Nations invited world leaders to New York for the Millennium Summit to discuss their evolving role in the new millennium. During the three-day summit, leaders established guiding principles centered on topics including human rights, working conditions, the environment, and anti-corruption. Following the summit, the Millennium Development Goals (MDGs) were established, outlining eight international development goals to be achieved by 2015. The MDGs are intended to spark discussion, but ultimately provide an opportunity for countries and companies to discuss ESG factors more candidly.

In the same year, the Carbon Disclosure Project (CDP) was launched. CDP encouraged institutional investors to ask companies to report on their climate impacts. This helped normalize ESG reporting practices, and by 2002, 245 companies had responded to 35 investor requests to disclose climate information.²

In 2004, the term “ESG” became official after its first mainstream appearance in a report titled “Who Cares Wins.” The report explains how to integrate ESG factors into company operations and breaks down ESG concepts into three basic components: environmental, social and governance (or corporate governance).

Over the next decade, more principles and frameworks were created to provide further guidance on how companies can integrate and report on ESG factors. Representative examples include the Principles for Responsible Investment (PRI), the Climate Disclosure Standards Board (CDSB), and the Sustainability Accounting Standards Board (SASB). Today, businesses and investors still rely on these principles and frameworks.

Last 10 Years: An Evolving Environment

In 2015, the Sustainable Development Goals (SDGs) replaced the MDGs. The SDGs outline 17 sustainability goals and set a global agenda for sustainable development with the hope of improving quality of life and achieving a more sustainable future by 2030. The SDGs are broader in scope, but set out the following specific goals (169 to be exact): Unique metrics to track your progress. The adoption of the SDGs has brought about a change in socio-political thinking. ESG is no longer a buzzword, but something that can and should be done. It is measured.

As investors continued to demand climate-related financial disclosures from companies, regulators responded with new reporting requirements. The Task Force on Climate-Related Financial Disclosures (TCFD) was established in 2015 with the goal of providing standards for climate-related disclosures for financial institutions, as well as corporations and investors.

Then, in 2017, a group of 140 CEOs came together to sign the Compact for Responsive and Accountable Leadership (Compact), drafted by the World Economic Forum. Signatories pledged to work together to help achieve the UN’s SDGs, which will be put to the test in 2020.

When the COVID-19 pandemic hit, many investors feared that companies would abandon ESG initiatives in order to survive. In some cases, that was the case, but an interesting discovery was made. Companies with strong ESG performance are better prepared to weather the pandemic because they have already considered the potential for disruption.^three

ESG Today and Tomorrow

ESG is no longer a fringe concept, but a family initialism for both companies and investors. Today, ESG data is used to evaluate a company’s performance on specific ESG issues. For example, carbon emissions per unit of revenue are used to evaluate a company’s environmental impact, while employee turnover is used to evaluate a company’s labor practices.

Asset managers today continue to develop a variety of ESG strategies and metrics to measure the environmental and social impact of their companies. Some strategies focus on excluding industries or organizations that do not meet specific ESG criteria. Others focus on actively selecting companies with strong ESG profiles.

New regulations have been enacted, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD), which requires companies to report the environmental and social impacts of their business activities and the impact of their ESG efforts on their business. In North America, the Securities and Exchange Commission (SEC) is considering mandating ESG reporting for public companies, as has been the case in Canada, Brazil, India, Australia, and Japan.

ESG ratings and indices have also become more prevalent in recent years. For example, Morgan Stanley Capital International (MSCI) offers a variety of ESG indices to help investors track companies based on ESG performance. These indices have become popular with investors looking to incorporate ESG factors into their portfolios.

As the world faces increasing challenges related to climate change and social issues, ESG considerations will continue to play a key role in how companies and investors operate and measure performance.

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One. US Sustainable Investment and Impact Investment Trends Report (Link resides outside ibm.com), US SIF, 2020

2. CDP Media Fact Sheet (Link resides outside ibm.com), CDP, October 2022

3. COVID-19 pandemic links calls for ‘harmonization’ of environmental, social and governance (ESG) investing and sustainability reporting (link resides outside ibm.com), Critical Perspectives on Accounting, Adams, Abhayawansa, February 28, 2022.