History of ESG
ESG Origins
In response to the increasing awareness of social and environmental issues within today’s society, corporations – both big and small – have begun to purposefully and deliberately apply the ESG framework within their practice. Although the term ESG itself only appeared in the early 21st century, the conscious effort of applying these standards within corporate practices has been visible from much earlier.
For example, the Exxon Valdez oil spill prompted the formation of the Coalition for Environmentally Responsible Economies in 1989, alongside the creation of the Valdez principles (later rebranded as CERES principles) which outlined the environmental conduct that the coalition must publicly adhere to. Moreover, one of the first socially responsible SRI (Socially Responsible Investing) indexes was first launched in May 1990. On the international stage, the United Nations Framework Convention of Climate Change was formed in 1994, aimed to create collective goals and policies for governments worldwide to implement in order to mitigate the impacts of climate change. Frameworks that have extrapolated on ESG such as the triple bottom line concept, highlighting the need for firms to focus on not only profit but also its people and the planet, have also been applied since the 1990s.
Case by Case Examples over the Decades
ESG was in the very early stages of its existence during the 1960s. Perhaps no clear example exists, but two enterprising businessmen, Robert Schwartz and Robert Zevin, provided some concrete cases for ESG. Their version of ESG-style policy had a significant focus on the Social and Governance aspect. For example, there was a gradual movement to reject potential investment possibilities in South Africa because one opposed Apartheid. For the first time, this challenged the notion of putting profit above all else.
The birth of this movement in the 1960s would set the tone for investors in the following decade, especially with the Civil Rights Movement taking place in the background. In 1971, the adopters of the socially responsible investments policy pivoted to the Vietnam war. The emerging views on ethically responsible investment led to the creation of the Pax World Balanced Fund (1971). The fund aimed to divest from firms such as Dow Jones, which were complicit in supplying the herbicide Agent Orange, which was used during the Vietnam War. It highlighted that investors were considering non-profit driven factors within their practice.
In 1990 the Domini 400 Social Index was founded, eventually becoming the MSCI KLD 400. By 1994 there were 26 sustainable funds and assets of around 1.9 billion dollars, indicating that the ESG investing industry was growing. The momentum continued in 1992, thanks to the UN Convention on Climate Change in Rio, which also produced the discourse around the term sustainable development. Another example was the GRI (Global Reporting Initiative), which came into existence in 1997. These initiatives provided an institutionalisation of whether companies or organisations were making responsible decisions. This legitimisation would become essential for firms and states in the following decades.
ESG’s Current Status
The term ESG was first referenced in a United Nations report titled
‘Who Cares Wins – Connecting Financial Markets to a Changing World’. This report argues that the consideration of environmental, social and governance factors will lead to an overall better and sustainable long-term outcome for both markets and societies. This report subsequently became the foundation for the launch of the Sustainable Stock Exchange Initiative (SSEI), and the Principles for Responsible (PRI) at the New York Stock Exchange.
Currently, ESG has advanced into the mainstream and has become a broad overarching concept applied by firms and governments within varying capacities. Since the Paris Agreement was signed in 2015, accountability of implementing ESG practices particularly through the creation of Sustainable Development Goals (SDGs) has augmented for countries worldwide. Furthermore, the COVID-19 pandemic accelerated the relevance of ESG through the stark exposure of socioeconomic disparities, such as access to healthcare systems and financial aid.
Due to its relatively recent rise in relevance however, numerous interpretations of the ESG concept have led to issues in the standardisation of ESG related metrics. These inconsistencies in methodologies lead to firms and governments creating their own self-definitions of ESG, which could foster issues such as bias in the interpretation of ESG data.
The Case of Poland
An example of current practices is seen through Poland embracing ESG policies in 2016. Poland's adoption of the Green Bond Framework would enable the state to issue green bonds specifically targeting financing or re-financing projects that meet their standards.
The Green Bond Principles that make up the standards described above include the Use of Proceeds, Project Evaluation and Selection, Management of Proceeds and Reporting. Use of Proceeds can be applied towards eligible sectors such as Renewable Energy, Sustainable Agricultural Operations, Afforestation, National Parks, Clean Transportation and Reclamation of Heaps.
Naturally, sectors that rely on fossil fuel burning or even transport fossil fuels (by rail, for example) are disqualified. Interestingly weapons, alcohol, gambling and adult entertainment industries are also banned, with this exclusion driven by the goods not falling in line with ESG criteria. The deal was initially met with scepticism by sustainability exports because they invested in fossil fuels. Positive interpretations viewed this as a commitment to change legislature according to green ambitions and taking the necessary steps for the future.
Arguably it set the tone for other nations, given that a coal-dependent economy such as Poland committed to switching to a greener future. China, France, Luxembourg and Nigeria all considered following suit after seeing Poland take the step.
Poland's move was highly significant not just because it was the first sovereign to issue green bonds but because it was a surprise due to the degree of coal mines it possessed. On December 16, 2020, Poland announced that green bonds issued amounted to EUR 750,000,000 with a five-year tenor.
Some of Poland's goals, alongside issuing green bonds, include a 15% total consumption of renewable energy through the Renewable Energy Action Plan. In 2020 they also aimed to create more carbon sinks through the National Programme for Augmentation of Forest Cover.
In sum, although the term has only recently risen in relevance, the history and practice of ESG could be traced from much earlier. The incremental steps that have been taken to implement non-profit driven policies over time has set the foundation of the ESG principles that we see and value today.