ESG, or environmental, social, and governance, is a known word for investors. Over the years, it has become an essential tool for analysing any company’s environmental and social impact on the world. Thus making it a necessary element of an investor’s investment decision-making process. Even though the United Nations may have used this word in 2004 for the first time, the ESG origin dates back much longer. Let’s understand the history of ESG through this article.
Pre-ESG
The ESG people know about today started to bloom in the mid-2000s. However, the history of ESG and its principles dates way back. Theoretically, we may classify attempts to improve fundamental working conditions during the Industrial Revolution as falling into the “S” and “G” categories.
In the 20th century, numerous campaigns forced companies to adopt more sustainable and fairer business practices. There is disagreement on how successfully they performed, but their existence is undeniable.
The abolition of labour exploitation, the financing of authoritarian regimes like apartheid, and the establishment of corporate governance codes – legal rulebooks that instruct businesses on how to run their operations, are a few examples.
The Origins of ESG and the Early Days of ESG Investing
To understand what ESG is the origin of ESG and its origin, it is necessary to understand who started ESG. The Pax World Fund was the first mutual fund in the United States to be made publicly available and to consider social and environmental factors when making investment decisions. It was founded in 1971 by two United Methodist preachers against the Vietnam War.
Hence, the early days can be traced back to the 1960s or 70s when SRI, or socially responsible investing, started to gain popularity. It involved choosing investments based on an organization’s impact on society and the environment. In 1980, CSR, or corporate social responsibility, came into existence.
CSR makes businesses responsible for their impact on the environment and society. However, the rise of ESG happened in 2000, especially in the investing world. The measurement and assessment of ESG elements lacked uniformity and consistency in the early days of the field.
The Evolution of ESG Over Time and the Rise of ESG Investing
Over the years, ESG has become more mainstream, with investors, stakeholders, and customers demanding that companies follow ESG practices. More and more regulations are being implemented, along with compliance procedures in place to ensure there are fewer deviations. Let’s look at how it has changed over the years by understanding the ESG history timeline:
1990: Domini 400 Social Index
Amy Domini created the Domini 400 Social Index for companies to focus on social and environmental responsibilities. At this time, this aspect was not so familiar to investors. Next year, she created a Domini Social Impact Equity Fund, which attracted $1.3 billion in 2001 with a return of 15.08% as compared to 15.25% for the S&P 500.
1992: United Nations Framework Convention on Climate Change
At the Earth Summit in Rio de Janeiro, a group of 154 countries signed an agreement to mitigate “dangerous human interference with the climate system.” It also launched an annual meeting of participants, called the Conference of the Parties (COP), to work out details and revise objectives.
1995: The United States First Sustainable Investment Inventory
The first comprehensive inventory of the magnitude of all sustainable investments was conducted by the Washington, D.C.-based Social Investment Forum Foundation, which is currently known as the U.S. SIF Foundation.
1997: Kyoto Protocol
This was adopted in 1997 but came into existence in 2005. 192 countries agreed to a specific greenhouse gas reduction target, 36 of which signed for the first commitment period.
1997: Launch of the Global Reporting Initiative
GRI, or the Global Reporting Initiative, was launched to address environmental concerns. It further expanded to address social and global issues as well.
2000: Global Compact of the United Nations
The Global Compact unit of the UN makes principles across human rights, anti-corruption, environment, and labor. More than 13000 agencies and corporations in 170 countries participate in it.
2000: Carbon Disclosure Project
Paul Dickinson organized and gave significant investors the authority to request that businesses disclose their climate performance and risk-reduction strategies through the Carbon Disclosure Project (CDP).
2004: First “Who Cares Wins” Report Published with the Term ESG
“Who Cares Wins” made ESG famous at one of the UN’s meetings, where banks and investment firms summarized their critical issues in this report.
2005: Freshfields Report
London-based firm Freshfields Bruckhaus Deringer published – A legal framework for impact: sustainability impact in investor-decision making.
2006: Principles for Responsible Investment
Six principles were published by environmental and investment experts, which tell how institutional investors should incorporate ESG trends in their decisions.
2007: Climate Disclosure Standards Board
A lot of businesses working on climate issues came forward and created the Climate Disclosure Standards Board.
2011: Sustainability Accounting Standards Board
The Sustainability Accounting Standards Board was established by Jean Rogers in order to provide relevant accounting standards that take into consideration how ESG issues affect an industry’s firms’ financial performance.
2015: U.N. Sustainable Development Goals
The United Nations General Assembly created the 17 Sustainable Development Goals (SDGs).
2015: Taskforce on Climate-related Financial Disclosures
The Financial Stability Board established the Task Force on Climate-related Financial Disclosures, an industry collaboration that offers recommendations on a range of hazards.
2016: Initiative for Workforce Disclosure
The Workforce Disclosure Initiative was started by the charitable organization Share Action, which advocates for ethical investing. The initiative seeks to improve the quality and utility of worker health, safety, and risk management data.
2017: The Responsive and Responsible Leadership Compact
Over 140 CEOs signed the Compact for Responsive and Responsible Leadership during the World Economic Forum (WEF) gathering in Davos, Switzerland.
2017: State Street Global Advisors and Board Diversity Difficulties
The asset management company State Street Global Advisors informed 600 firms in the US, UK, and Australia that it will vote against the chairs of boards that do not have any female candidates or directors.
2019: Davos Manifesto 2020
The Davos Manifesto 2020 is a collection of moral guidelines that the WEF releases to help businesses navigate the Fourth Industrial Revolution.
2020: COVID-19 Pandemic and Other Events
Millions of workers were compelled to work from home because of the COVID-19 epidemic. It demonstrates how an invisible threat may completely disrupt both the global economy and people’s quality of life.
2020: Standardized Metrics for Stakeholder Capitalism
The Big Four accounting firms and WEF issued a whitepaper on standardized indicators for businesses reporting on their ESG progress.
2021: The European Union’s Sustainable Finance Disclosure Regulations
Requirements on characterizing funds with specified sustainable investment objectives that enhance environmental or social features and those that are non-sustainable were set by the Sustainable Finance Disclosure Regulation of the European Union.
2022: Tesla Ejected from S&P Sustainability Index
Tesla was removed from the S&P 500 ESG Index one month after Musk started talks to buy Twitter. This was because of a “rebalance” and the company’s “decline in criteria level scores”.
2022: Consolidation of Sustainability Standards
To form the International Sustainability Standards Board, the Sustainable Accounting Standards Board standards were overseen by the Value Reporting Foundation (VRF), which consolidated into the IFRS.
2023: EU’s Corporate Sustainability Reporting Directives
According to a recent rule from the European Union, corporations based in the EU, as well as non-EU companies doing business there, soon had to audit sustainability data and provide corporate sustainability information about how they fit with an EU ESG-related taxonomy.
ESG Today: Current Practices and Trends
Here are some things that can be checked from the ESG origin time to today:
- Companies will focus on clear, measurable, and actionable plans to net zero.
- Transition towards renewable energy.
- Geopolitical priorities to shape ESG.
- Businesses will use AI and circularity to reduce waste.
- Working hand-in-hand with environmental regulations.
- New carbon pricing regime
- Supply chain to achieve net zero.
Conclusion
Although the word ESG has just gained widespread recognition in the last 20 years, the history of ESG in investing goes way back. In the end, it all comes down to ethical business practices and responsible investing, which varies throughout time based on the interests of various market generations.
FAQ’s on History of ESG
What is ESG and its origin?
In the investing world, environmental, social, and governance, or ESG, is a well-known concept. It is believed that the history of ESG investing goes back to the 1970s.
What is the evolution of ESG?
The social unrest of the 1960s and 1970s is where ESG first emerged.
When did ESG start in India?
The National Voluntary Guidelines on Economic, Social, and Environmental Responsibilities of Business were introduced by the Indian government in 2007.
