ESG sets criteria for environmental, social and corporate governance. Investment funds are increasingly relying on them to screen stocks and bonds issued by an organization.

Environmental, social and governance issues should be viewed in the overall context of the concept of sustainable development, which was developed in 1987 by the Brundtland Commission. Sustainable development refers to development that “meets the needs of the present, but does not jeopardize the ability of future generations to meet their own needs.” This concept emerged from the combination of three main points of view: economic, social and environmental. It does not lose its relevance, since it is based on justice in relation to future generations.

The 1960s saw the birth of the modern age of activism. Students protesting against the Vietnam War called on university funds to stop investing in weapons.

In 1970, due to racial segregation in South Africa, there was a massive outflow of investment for ethical reasons, which eventually led to a softening of the regime. So the social responsibility of the business was put above the financial benefits. Many states and municipalities in the United States have revised their pension fund portfolios and got rid of stocks in companies that did business in a racially segregated country.

By the 1980s, environmental aspects were a top priority for caring investors. This was the result of a number of environmental disasters – accidents at nuclear power plants in Three Mile Island and Chernobyl, as well as numerous crude oil spills.

Gradually developing and transforming, the new approach was finally formed by the beginning of the 21st century.

In 1990, the Intergovernmental Panel on Climate Change (IPCC) published a report concluding that skyrocketing carbon and methane emissions are leading to the melting of polar glaciers, sea level rise and environmental disaster.

In subsequent reports, the IPCC detailed the impending crisis, and developed countries recognized the need for a global response. Fighting climate change soon became the main focus of the ESG.

In 2015, with the support of the UN, the Paris Agreement was adopted, which was joined by 196 countries. They are committed to reducing global temperature increases this century by no more than two degrees Celsius above the pre-industrial era. Scientists believe that this will mitigate the most catastrophic consequences of changing the atmosphere.

 

ESG investing: why it is worth investing in green companies, smart cities and how it benefits

Now investment managers and boards of directors had to consider new carbon regulations. Various organizations analyzed the activities of the companies and made their ratings according to the ESG criteria, which were guided by investors.

The idea of linking investment to social responsibility has been around for a long time. As early as the 19th century, Quaker and Methodist groups urged business leaders to avoid businesses supporting slavery, as well as those who made money from bad habits such as drinking alcohol and smoking tobacco.

The principles of responsible investing were first formulated in 2006 at the UN. The organization created them for participants in the financial market and began to implement them on the New York Stock Exchange. Investors who wanted to know for sure whether the project in which they are investing carries risks for the environment and society, received an investment control tool. Since then, ESG ratings have served as a benchmark in assessing the effectiveness and consistency of adherence to these principles.

Their example was followed by corporate boards. As a result, large retirement funds such as the California Public Employees’ Retirement System (CalPERS) have recognized their ability and responsibility to drive change that benefits society.

This was the year the term was first coined by Yvo Nöpfel in a landmark study entitled  “Who Cares Wins”, which argued for integrating environmental, social and governance principles into the capital market system. Around the same time, UNEP / Fi released the Freshfields Report, which clarified the relationship between companies accepting strong ESG proposals and their financial valuation. Together, these two reports, building on the already broken SRI movement, launched the ESG movement.

2020, the “year” of many things – COVID-19, elections, violence, economic downturn – is also referred to as the ESG’s “coming of age” year. This approach is of particular importance today when many businesses are beginning to take care of the health and safety of not only their employees, but also residents of nearby communities. Indeed, ESG bond issuance hit a record $ 732 billion in 2020, according to Bloomberg.

Almost $ 40 trillion is held in ESG assets around the world, according to the Global Sustainable Investment Alliance.

According to Bloomberg Intelligence forecasts, ESG’s assets will reach $ 53 trillion by 2025, accounting for a third of total global investment.

An entire industry of data scientists – Morningstar, MSCI, Bloomberg, and many more – is analyzing and evaluating how well companies are meeting carbon targets and human and worker rights.