What is the history of ESG? - The Corporate Governance Institute (2024)

If the history of ESG (environment, social and governance) shows us one thing, it’s that the concept is a lot older than we might think.

And it’s grown exponentially. Love it or hate it, ESG now impacts almost every organisation.

Experts recently claimed that financial firms worldwide would have “no choice” but to embrace it.

The modern concept of ESG, which we’re so familiar with today, took shape in the mid-2000s. However, the principles behind ESG are decades, maybe even centuries, old. It depends on where you draw the line.

Theoretically, we could look at improving basic labour conditions during the industrial revolution as efforts in the “S” and “G” categories.

Throughout the 20th century, we have seen plenty of campaigns pressuring companies into fairer, more sustainable business practices. How well they worked is a matter of debate, but their presence isn’t under any doubt.

Examples include efforts to stop the exploitation of workers, the funding of wars or oppressive regimes like apartheid, and the introduction of corporate governance codes – legal “rulebooks” telling companies how to manage themselves.

Events like these demonstrated that governments, investors and consumers recognised the power of corporate entities to shape the world around them. Over time, this power came under more and more scrutiny.

A 2004 report from the United Nations – titled Who Cares Wins – carried what is widely considered the first mainstream mention of ESG in the modern context.

This report leaned in heavily, encouraging all business stakeholders to embrace ESG long-term. Managers, directors, investors, analysts, brokers – the report addressed them all.

These developments coincided with increased international attention on the same issues. Rapidly, people cared more about sustainability, respect and diversity in the workplace. Campaigns on these issues haven’t waned since.

Nearly two decades have passed since the publication of Who Cares Wins, and in that time, governments worldwide have updated their laws to emphasise ESG.

In the UK, the government passed the Companies Act (2006) to form the primary source of company law and essentially set standards in the “G” category.

Meanwhile, environmental laws have been passed across the globe, fuelled by the urgency of the climate crisis, the UN’s persistent rhetoric on sustainability, and international summits like COP26.

The “S” category has also seen a boost, with laws passed that criminalise discrimination and, in some cases, encourage diversity.

As the concept has grown, so have efforts to derail it.

Most of these efforts come from the socially conservative fiscal right. Since this political movement has a strong hold over US politics, America has rapidly become the centre of ESG opposition.

The critics dismiss ESG as “woke capitalism” and say it forces companies to shy away from their maximum potential. ESG proponents argue that companies can and should incorporate the concept into a business strategy, so their success won’t be threatened.

Now, ESG has come down to investment and reporting.

Some of the most significant investment firms in the world, like BlackRock Inc., have made ESG a top priority within their daily business. Many other firms have followed suit. In their view, ESG is here to stay, so they had better get used to it sooner than later.

But there’s still one big problem: even though stakeholders have welcomed ESG worldwide, the concept still has no uniform reporting standards.

Companies and investors measure different things and report in different ways. It gets confusing fast, especially when investors try and de-code whether their money has made a difference or not.

The solution will be a long time in the making. Global markets must standardise their reporting and metrics, and that’s no easy task.

The biggest recent stride has been the EU’s Sustainable Finance Disclosure Regulation (SFDR) – a 2019 measure to bring order to the chaotic sustainable investing market.

SFDR categorises investments based on how “green” they are and sets reporting benchmarks to ensure everyone is on the same page. Its introduction has still brought some confusion, but its future – with adjustments – is certain.

The term “ESG” has only enjoyed global prominence for two decades, but the principles feeding it are far older.

Ultimately it is all about responsible investing in ethical business practices, and it fluctuates over time depending on what different market generations care about.