The origin of ESG - Environmental, Social, Governance
Updated: Sep 25, 2022
When & How was ESG formed?
ESG has been a hot topic lately, but not many people really know its birth.
Shaped for the first time in the report “Who Cares Wins– Connecting Financial Markets to a Changing World” (2004), ESG is the product of a great collaboration between the UN Global Compact and more than 50 other financial institutions leaders. The ultimate goal of ESG is to make the consideration of non-financial factors in profit-oriented investment become a common practice which then promotes a system of more sustainable and responsible businesses.
The ESG concept never stands alone but shares a bigger umbrella with CSR (Corporate Social Responsibility), Stakeholder capitalism, and Sustainability. Despite the fact that ESG was only on the map of investment for around a decade, the first light of it should be considered at the start of CSR.
After World War II, the idea of CSR has come to light, propagating that companies move beyond the sole profit maximization purpose to take care of social responsibilities. By the time, this responsibility concept has been broadened, not only limited to a social but more holistic approach toward the environment and others. The second turning point that contributes to building a profound ESG idea is the shifting from a shareholder capitalism center to a stakeholder capitalism perspective which means that the company needs to look after the well-being of a broader stakeholder group instead of shareholders. Stakeholders are any individual or group who affect or are affected by the company operation and business relationship, including but not limited to employees, customers, investors, government, community...It is also worth mentioning that sustainability theory, primarily the 2030 UN Sustainable Development Goals further strengthen the ESG notion. All in all, it points to a long-lasting business.
Although it has been around for quite some time, there is still so much confusion about ESG such as how ESG works, especially with the complicated incomparable ESG rating systems. MSCI, S&P global, and Sustainalytics are well-known names for this. In the end, this uncertainty might undermine the credibility of ESG assessment, distort the true meaning of ESG or open the door to another problem - greenwashing.
In the following article we look closer at these problems.
ESG provides a great deal of insight on
How a business is doing
What are the impacts on the planet and the people?
How resilient the business might be in the uncertain future.
It is fair to say that the increasing interest in ESG and ESG investing has driven the change in the way of doing business.
And yes, we are still looking forward to seeing a greater movement in the future.