A Short History of ESG

What is ESG?

Environmental, Social and Governance (ESG) criteria are a broad set of standards used by companies and investors to disclose and assess performance against non-financial measures like a company’s impact on climate change and broader society.

Environmental: Factors that consider a company’s impact on the natural world and its position to deal with climate change. Common Environmental metrics include a firm’s greenhouse gas emissions (GHG), water and electricity usage, waste management, climate change vulnerability, and product innovation.

Social: Factors that consider a company’s social impact, both in and outside of its organizational chart. Social metrics include workforce diversity, employee safety, and how companies advocate for good in their communities.

Governance: Factors that consider leadership’s commitment to positive change. This includes adherence to high ethical standards and policies and processes to ensure the company is managed well. Governance metrics include implementing policies on environmental protection, corruption, data security and discrimination. They also include comparative measures on executive pay equality, and how leadership interacts with employees and board members.

Biblical Roots

The concept of ESG dates to Biblical times when various religions demanded investments be in alignment with their guiding principles. In Islam, Shariah law forbids buying on credit, and investments in things like alcohol and pork, among others. Additionally, in the 18th century, Methodists in the United States who frowned on slavery, illegal smuggling, and open debauchery began rejecting investments in entities making and selling tobacco products, liquor, or vices like gambling.

In the mid 20th century, politics became the vector for ESG like investments when protestors against the Vietnam War boycotted companies who supported the war effort and demanded large funds like university endowments stop investing in them. The concept of ESG continued to build momentum throughout the 1960s with prominent social movements including black power and women’s rights, when wide ranging protests caused companies and investors to take note.

The Emergence of Earth Day

A landmark event for the ESG movement occurred in 1970 when Gaylord Nelson, a junior Senator from Wisconsin, incited almost 10% of the United States population to protest environmental destruction in what is now referred to as Earth Day. The first Earth Day drove a series of major actions towards wider adoption of environmental conservation.

According to Earthday.org:

“by the end of 1970, the first Earth Day led to the creation of the United States Environmental Protection Agency and the passage of other first of their kind environmental laws, including the National Environmental Education Act, the Occupational Safety and Health Act, and the Clean Air Act, which was enacted by Congress two years later. Over the following two years, Congress passed the Clean Water Act, the Endangered Species Act and the federal Insecticide, Fungicide, and Rodenticide Act. These laws have protected millions of men, women and children from disease and death and have protected hundreds of species from extinction.”

More recently, ESG began to professionalize. Specifically in the investor community. In 1990 the Domini 400, the first socially oriented stock index fund, was created. By 1994, twenty-six similar funds had grown to $2 billion in assets under management (AUM). This quick growth was an indicator of ESG’s AUM trajectory over the next twenty-five years.

International Action

In 1992, the United Nations held its landmark ‘Earth Summit’ in Rio de Janeiro. It resulted in one-hundred and fifty-four countries signing an international treaty aimed to reduce environmental impact across the planet. It took nearly a decade for the UN to figure out how to turn the intention from the Earth Summit to action. This occurred in 1997 when the Kyoto Protocol was launched. Since it went into effect in 2005, Kyoto has helped nearly two-hundred countries set GHG emissions to reduce the impact of global warming.

These events led to a further professionalization of ESG throughout the 1990s and 2000s. Organizations like the Global Reporting Initiative (GRI) (1997), Carbon Disclosure Project (CDP) (2000), Sustainability Accounting Standards Board (SASB) (2011), and Task Force for Climate-related Financial Disclosure (TCFD) (2015), have provided more rigor around what it means to invest and act responsibly. ‘ESG,’ as a term, was coined in the 2006 United Nations Principles for Responsible Investment (PRI) Report and has grown to be the overarching way for investors and business leaders to discuss the message behind each of these standards.

ESG’s momentum continued to build in 2015 when at the United Nations Framework Convention, when the Paris Climate Agreement was signed, and the United Nations Sustainable Develop Goals (SDGs) were created. The Paris Agreement’s long-term goal is to reduce the impacts of climate change by keeping the rise in global average temperature to below 2 °C (3.6 °F) above pre-industrial levels, but to pursue efforts to limit the increase to 1.5 °C (2.7 °F).

Coming out of the Paris Agreement, ESG continues to become more widely known. In 2019 over 180 CEOs signed the Business Roundtable’s (BRT) statement on the purpose of a corporation, committing to lead their companies for the benefit of all stakeholders, not just shareholders. Shortly after, BlackRock, the world’s largest asset manager publicly made ESG a priority, and its resulting actions have made other large investors prioritize it as well. In Europe, passage of the Sustainable Finance Disclosure Regulation (SFDR) makes disclosure more robust for asset managers, and the Biden Administration has already hinted at making ESG mandatory for US public companies in the future.

The Path Forward

Understanding the history of ESG helps shape our understanding for where it might go in the future. When the concept started in the later 1880s it was of no concern for most businesses. Over the past century, especially in recent years, ESG has increasingly become a critical factor for shaping business strategy.