In recent years, and now more than ever, Environmental, Social and Governance, known in short by ESG, became a familiar acronym around the world.
While we began to look at it as a trend, ESG has become much more than that, particularly, when companies need to take decisions that will influence their capacity to attract investment.
Legislation… what else?
Significant legislative initiatives have been taken to date, intending to provide a framework with which companies and investors alike may work with, in order to embody in their decision making the three pillars that make up for ESG: “Environmental” looks at the impact that a given company has on the environment; “Social” is related with how firms impact the overall community, their stakeholders and employees; “Governance” relates to the corporate behavior and governance structure of the company.
Amongst the various European diplomas, we can underline these:
- The Sustainable Finance Disclosure Regulation (SFDR), enacted in November 2019, aims at improving transparency in the market for sustainable investment products, making the sustainability profile of funds more comparable and understandable by end-investors, and preventing greenwashing.
- The Regulation on Taxonomy, from June 2020, through which an EU-wide classification system is established, with a view to providing businesses and investors with a common language, to identify to what degree economic activities can be considered environmentally sustainable. Is my product sufficiently “green”? One of the objectives of the SFDR is for companies to disclose information on their business strategy and “political” decisions, including specific details related with the level of sustainability of their financial products. It distinguishes three types:
- Article 9: Funds that have been specifically created to address sustainability goals… known as DARKGREEN.
- Article 8: Funds that promote sustainable characteristics but not as an overarching objective… or LIGHTGREEN.
- Article 6: Non-sustainable funds… NO-GREEN.
Socially Responsible Investing (SRI) and ESG… Where do these come from?
According to Matt Kelley and Chris Sardi (Portfolio Strategy Manager and Analyst, respectively), the first form of SRI dates back the 1800s, when the Methodist Church urged its members to restrict investments in controversial companies, namely alcohol, tobacco, weapons, and gambling ones!
As for “ESG”, George Kell, author of various books and articles on sustainable investment, says that ESG investing began in 2004, when former UN Secretary General Kofi Annan invited 50 CEOs of major financial institutions to find ways to integrate ESG into capital markets. A year later, this initiative produced a report named “Who Cares Wins”, where “ESG” was first coined. 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.
Controversial… yes, but…
Certainly, controversial throughout time, but increasingly vital, many have addressed this topic in different occasions. In an article written in 2020 for “The Journal of Impact & ESG Investing” Blaine Townsend says that using any “social” criteria in investing went against conventional wisdom, and traditional socially responsible investing had many more critics than investment vehicles. The Economist Milton Friedman, for instance, came up with what Townsend refers to as the most famous soundbite of the era, saying that “the social responsibility of business is to increase profits”. While criticism came from within and outside the financial world, it is reassuring to know that many navigated against the tide, setting the scene for what would become an unstoppable path.
A good example was provided by Morris Milgram, founder of a real estate investment trust in the 1960s, who left us with a remarkable quote: “Life is too short to do anything but build the kind of world one believes in.”
In 2022, can we say that ESG came of age? We surely can!
This article first appeared in The Network Forum Issue No. 9