ESG stands for Environmental, Social, and Governance. Established to help define the environmental, social, and corporate accountability a company demonstrates and can document, the term ESG is often used to help prospective investors and current stockholders assess how a company aligns with the investor’s own principles of what is socially and environmentally ethical and acceptable. This report offers a timeline of how this direction has emerged and why it may presently represent one of the strongest drivers of U.S. economic direction both now and for the foreseeable future.
Where once ESG investors might have been categorized as “tree huggers,” shifting public sentiment has made ESG a mainstream value. As 2020 has catapulted from a year of record low unemployment and a thriving stock market to a time of global pandemic, staggering unemployment levels, and civil chaos and unrest, environmental, social, and governance-minded investing and asset selection has accelerated.
History of ESG Investment Funds
In 1971, two protestant ministers1 sought an alternative to investing church dollars in companies that supported the Vietnam War through their goods or services. To that end, the ministers established an investable fund aligned with their own values.
Civil unrest in the Seventies led to the establishment of other funds comprised of “socially responsible stocks.” In the 1980s, anti-apartheid issues in South Africa, the Exxon Valdez oil spill, and other landmark events heightened awareness and enhanced demand for corporate responsibility.
More recently, global warming, fracking, mass deforestation, and concerns about water and air quality, have been key among many issues that have brought sustainability and social responsibility to the fore and expanded the call for quantifiable corporate accountability.
In 2004, United Nations Secretary General Kofi Annan enlisted CEOs from major financial institutions to participate in the Global Reporting Initiative, with a goal of incorporating ESG into capital markets. HSBC, Deutsche Bank, Goldman Sachs, World Bank Group, KLP Insurance, Credit Suisse Group, and other heavy hitters were all represented at the table.
One of the significant outcomes of this effort was the production of a report, titled, “Who Cares Wins.” The 59-page document laid groundwork for how to “…better integrate environmental, social, and governance issues in analysis, asset management, and securities brokerage.”
Looking Ahead: Responsibility and Sustainability
In his 2018 annual letter to CEOs, BlackRock founder and CEO, Lawrence (Larry) Fink, described his perception that, “we are on the edge of a fundamental reshaping of finance.” He went on to observe, “climate risk is investment risk” and then to call for “improved disclosure for shareholders,” and “accountable and transparent capitalism”. Specifically, Fink reminded readers, “As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders… Disclosure should be a means to achieving a more sustainable and inclusive capitalism.”
Last year, Fink underpinned his message of corporate responsibility with a call for leadership. He cited the organization’s engagement priorities for 2019 as: “governance, including your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management.” All in all, that’s a checklist that solidly summarizes the concepts and the direction of ESG.
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