The roots of ESG emerge from Socially Responsible Investing (SRI), where money is not invested in companies that engage in environmentally and socially irresponsible practices. In fact the first instance of SRI dates back 200 years ago where the Methodist movement protested against investing in companies that were involved with making weapons and tobacco. The main difference between SRI and ESG lies in the fact that investing based on ESG criteria is considered to make financial sense as well, and is not solely tied to a moralistic stance against unethical businesses.
As such, ESG investing began in January 2004 when former UN Secretary General Kofi Annan wrote to over 50 CEOs of major financial institutions, inviting them to participate in a joint initiative under the auspices of the UN Global Compact and with the support of the International Finance Corporation (IFC) and the Swiss Government. The goal of the initiative was to find ways to integrate ESG into capital markets.
A year later this initiative produced a report titled ‘Who cares Wins’. The report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. And it does. At the same time, a similar report called the ‘Freshfield Report’ was produced by UNEP, which highlighted how ESG issues are particularly relevant for financial valuation. Together, these two reports formed the backbone for the launch of the Principles of Responsible Investment (PRI) at the New York Stock Exchange in 2006 and the launch of the Sustainable Stock Exchange Initiative (SSEI) a year later.
Today, the PRI now has 1600 members representing assets worth over $70 trillion. As the effects of the climate crisis are felt more widely and accepted, it is without doubt that ESG compliance is going to become increasingly important. Already we have seen ESG investments accelerating, most evident between 2014-2016 where ESG commitment had increase by 41% - amounting to $8.4 trillion worth of assets according to the GSIA.
Interestingly, investments in green stocks and companies during the coronavirus have faired much better as a result of their ESG parameters, and are as such reaping better financial results. All in all it emphasises how they are proving to be more resilient in the downturn, and yet still retaining all the impact they are having.
The greatest barrier that is currently preventing ESG compliance to be the norm is the lack of data available to stakeholders. The ESG ecosystem involves investors, governments, international regulators and data providers, where the data providers are the backbone of this ecosystem and the ones to fuel all the other members’ decisions. What we need now is the government to prioritise and work towards providing high resolution data such as AI and satellite imagery, that will provide stakeholders with the necessary information so that they can invest with confidence. Prioritising these efforts is imperative if we are to mitigate climate-change disasters that are now happening far too often.