Posted: 08 Dec 2022 by Lauren Garghan

A brief history: how ESG investing came to be

A brief history: how ESG investing came to be

 

The history of how ESG investing came to be could be traced back as far as the 1960s, when funds were opted towards more socially responsible business practices. This type of investing aimed to combat the negative social impacts within the tobacco industry and business involvement in the South African apartheid regime

Money does indeed talk. Therefore people understood that divesting away from less responsible business practices could potentially encourage a response towards improvement within the market.

Moving operations abroad allowed businesses in western countries to take advantage of cheaper labour and cheaper raw materials in developing nations. While this method of cost cutting vastly improved their bottom line, it would all come at a different cost further down the line.

A brief history: how ESG investing came to be

The Global Impact

In 2004, the UN commissioned a report that called for “better inclusion of environmental, social and corporate governance factors in investment decisions.” This would mark the creation of the now famous acronym ESG. When such an influential message comes from an establishment like the UN, one can expect it to have a sizable impact within the culture.

Around this time there was also an escalating awareness about the negative impacts of climate change on the planet. Not to mention a growing anxiety around the influence Big Pharma and Big Tech companies were having on politics and governance within the boardroom.

So in effect, the convergence of these key factors would inevitably call the world into action. Over time, the acronym “ESG” would finally catch on. The term itself is appropriate given that it covers three common areas of anxiety within the culture: the planet, people welfare and governing bodies.

 

Corporate Acceptance

Asset management company Pimco tracked that by May of 2021, the term “ESG” had now been mentioned in nearly a fifth of corporate earnings calls. This corporate adoption meant that a clear demand had now been created and therefore the supply of ESG investment would inevitably hop on to take advantage of this new gold rush.

Then in the background, the COP26 2021 initiative was uniting some 153 countries to put forward Nationally Determined Contributions (NDCs) as a commitment to achieving net-zero (another popular buzzword in the conversation). All this serves only to turn up the heat (pardon the pun) on the demand for ESG investment. Furthermore, the COP26 Pact would outline: mitigation, adaptation, collaboration and of course… finance as being one of its key ingredients for helping countries succeed in their net zero goals.

Where are we now?

According to Deloitte Insights: “At the end of Q1 2021, assets in discretionary mandates with an ESG investment approach, Article 8, and Article 9 funds in the EU totaled US$13 trillion, representing 40% of the total assets under management.”

This figure shows the surge in ESG-mandated assets and looks to be on track for around half of all professionally managed assets to follow suit by 2024. Suffice to say, ESG investment will be a huge opportunity for investment managers in the years to come.

A brief history: how ESG investing came to be

The advent of ‘Greenwashing’

A growth in opportunity means there will unfortunately be those that see ESG as a way to exploit a financial position or investment. One of the criticisms is that the definition of “ESG” allows for businesses to exploit its ambiguity. Environmental, social and governance can potentially be at conflict with each other within any business. 

ESG data gathering has also been called into question. How comprehensively is an ESG-mandated asset actually being measured? Are sustainability metrics actually based on a full three-scope audit of a business’ total impact for all three sections within ESG?

Greenwashing has therefore become a term that’s been closely linked with ESG. Manipulation or indeed, misrepresenting ESG data when reporting will be a way to game the system.  

So how do businesses avoid being accused of Greenwashing?

 

STAR Index

The solution is to ensure that data gathering and reporting is of an accurate and granular nature. E, S and G covers a huge variety of complex information and data metrics. Particularly across scopes 1, 2 and 3. So businesses need to ensure they have the means to gather, manage and report the vast body of data that’s in line with their ESG commitments.

Visibility is a key factor in avoiding unexpected surprises within your supply chain. Accusations of Greenwashing could arise from important data not being readily available for stakeholders to address in good time. If you can’t see it, you can’t manage it.

The STAR Index method is delivered without replacing current systems and processes, therefore capitalising on, and strengthening existing information, ensuring actionable insights are delivered quickly.

 

Our leading platform allows you to manage supply chain risk with clarity and confidence by allowing you to report down your entire supply chain, not just to tier 2, to ensure your supply chains are the best for our planet and its people. 

Unsure where to start? Then take a look at our host of partners who are happy to help you with any ESG or sustainability issues.

Talk to us today!

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