Introduction:
ESG (Environmental, Social, and Governance) investing has undergone a remarkable transformation over the years, stemming from various initiatives aimed at fostering sustainable development. This blog delves into the historical development of ESG, tracing its roots from early exclusionary practices to its current proactive role in responsible investing. Moreover, we will explore the diverse platforms that have emerged to support ESG principles, driving positive change in the world of finance.
The Origins of ESG:
The origins of ESG can be traced back to the 1960s when investors began excluding certain industries, such as tobacco or those associated with apartheid, from their investment portfolios. This initial form of socially responsible investing laid the groundwork for subsequent developments. However, it was in the 1980s that the first recognizable version of ESG emerged, with the introduction of Environmental, Health, and Safety (EHS) regulations in the United States.
The Rise of Corporate Sustainability:
Throughout the 1990s, the concept of corporate sustainability gained prominence as an extension of EHS practices. Organizations recognized the need to surpass mere compliance with environmental regulations and adopted proactive measures to reduce their ecological footprint. This shift in mindset marked a significant milestone in the ESG journey, as companies acknowledged their responsibility towards the environment.
The Era of Corporate Social Responsibility:
As the new millennium dawned, attention expanded beyond environmental concerns to encompass social issues. The early 2000s witnessed the rise of Corporate Social Responsibility (CSR), emphasizing the importance of businesses engaging with and addressing social challenges. Companies began integrating philanthropy, community involvement, and fair labor practices into their operations.
ESG as a Proactive Movement:
In the 2010s and beyond, ESG gained momentum as a proactive movement rather than a reactive one. Investors and companies alike recognized the direct impact of ESG factors on financial performance and long-term sustainability. Consequently, ESG considerations became integral to investment decision-making and corporate strategy.
The Business Case for ESG:
Today, ESG is no longer perceived as a niche or optional approach. Multiple studies have demonstrated the positive correlation between robust ESG performance and financial returns. Investors now understand that considering ESG factors can mitigate risks, enhance brand reputation, and drive innovation. Consequently, institutional investors, asset managers, and individual investors are increasingly integrating ESG criteria into their investment strategies.
Different Platforms for ESG:
Over the years, various platforms have emerged to support the advancement of ESG principles. These platforms include sustainability indices, such as the FTSE4Good and Dow Jones Sustainability Indices, which provide investors with benchmarks to evaluate companies’ ESG performance. Additionally, global reporting frameworks like the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) offer guidelines for companies to disclose their ESG-related information in a standardized and transparent manner.
Over the years, various platforms have emerged to support the advancement of ESG principles. These platforms include:
- The Science-Based Targets initiative (SBTi):
The Science Based Targets initiative (SBTi) is a collaborative effort between CDP, UNGC, WRI, and WWF. It provides a framework for companies to set science-based targets (SBTs) to reduce greenhouse gas emissions in line with the goals of the Paris Agreement. SBTs are based on the best available scientific knowledge and help companies contribute to global efforts to mitigate climate change. The SBTi offers guidance, resources, and tools to support companies in setting and achieving their SBTs, driving innovation, enhancing reputation, and attracting investment. By aligning with SBTs, companies can manage climate risks and seize opportunities in the low-carbon economy.
- The Sustainability Accounting Standards Board (SASB):
The SASB provides industry-specific standards for sustainability disclosure. These standards are designed to be cost-effective for companies and decision-useful for investors. They are developed through a rigorous process that includes evidence-based research, market consultation, and public comment. By providing specific metrics and guidance for each industry, SASB enables companies to report on material ESG factors most relevant to their sector, facilitating comparability and transparency in ESG reporting.
- The Transition Plan Taskforce (TPT) Disclosure Framework:
The TPT Disclosure Framework recommends disclosure of a company’s strategic climate ambition, implementation and engagement approaches, governance and accountability arrangements, and financial plans. By disclosing this information, companies provide investors with better forward-looking information, allowing them to assess the company’s future prospects more accurately. The TPT Framework helps companies communicate their plans and actions related to the transition to a low-carbon economy, supporting investors in making informed decisions.
- International Sustainability Standards Board (ISSB):
The ISSB is a newly established global sustainability standard-setting board that aims to develop a comprehensive set of sustainability standards for companies worldwide. Expected to launch in 2022, the ISSB will operate under the oversight of the International Financial Reporting Standards Foundation (IFRS). The ISSB’s objective is to provide a unified framework for sustainability reporting, ensuring consistency, comparability, and reliability of ESG disclosures across industries and jurisdictions.
- Carbon Disclosure Project (CDP):
The CDP is a widely recognized platform that encourages companies to disclose their environmental impact, particularly in relation to greenhouse gas emissions and climate change. The CDP provides a comprehensive system for companies to measure, manage, and disclose their environmental data. By participating in the CDP, companies demonstrate their commitment to transparency and accountability in addressing climate-related risks and opportunities.
The Future of ESG:
Looking ahead, ESG is set to continue its upward trajectory. With increasing awareness about climate change, social inequality, and corporate governance issues, investors are demanding greater transparency and accountability from companies. Consequently, businesses are integrating sustainability practices into their core operations, focusing on long-term value creation and aligning their strategies with the United Nations Sustainable Development Goals (SDGs).
Conclusion:
ESG has evolved significantly from its humble origins, progressing from a narrow exclusionary approach to a comprehensive framework for sustainable investing. As we move forward, it is crucial for companies and investors to recognize the intrinsic value of ESG considerations. By embracing ESG principles, we can collectively drive positive change, create a more sustainable future, and ensure the well-being of both our planet and society. The emergence of various platforms dedicated to ESG, such as the SBTi, SASB, TPT, ISSB, and CDP, further supports this transformative journey, facilitating informed investment decisions, standardized disclosure, strategic climate planning, and comprehensive environmental reporting.
References:
- Forbes. (2021, June 22). A Brief History Of ESG Investing. Forbes. https://www.forbes.com/advisor/investing/esg-investing-history/
- Investopedia. (2021, August 23). Corporate Sustainability: What You Need to Know. Investopedia. https://www.investopedia.com/terms/c/corporate-sustainability.asp
- Investopedia. (2021, August 23). Corporate Social Responsibility (CSR). Investopedia. https://www.investopedia.com/terms/c/corp-social-responsibility.asp
- Investopedia. (2021, August 23). Different Platforms for Environmental, Social and Governance (ESG) Investing. Investopedia. https://www.investopedia.com/terms/e/esg-investing-platforms.asp
- ESG (Environmental, Social, & Governance). https://corporatefinanceinstitute.com/resources/esg/esg-environmental-social-governance/
- SBTi. (n.d.). About SBTi. Science Based Targets initiative (SBTi). https://sciencebasedtargets.org/about-us/
- SASB. (n.d.). About SASB Standards. Sustainability Accounting Standards Board (SASB). https://www.sasb.org/standards/
- HM Treasury. (2022). Transition Plan Taskforce: Disclosure Framework. HM Treasury. https://www.gov.uk/government/publications/transition-plan-taskforce-disclosure-framework
- IFRS. (2021). International Sustainability Standards Board (ISSB). International Financial Reporting Standards Foundation (IFRS). https://www.ifrs.org/boards/international-sustainability-standards-board/
- CDP. (n.d.). About CDP. Carbon Disclosure Project (CDP). https://www.cdp.net/en/about-us
Author’s Profile:
Dr. Ifrah Bukhari is a Business Analyst at Softech360, where she leverages her expertise in IT consulting to champion sustainable business practices. Certified in Business Automation, ESG risks and climate change, she guides organizations through the complexities of sustainability, offering strategies to meet their ESG goals. As a published author, Dr. Bukhari uniquely combines IT and sustainability, providing innovative solutions that ensure long-term organizational value and contribute to a greener future.
