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What is ESG : Its Origin and Significance in Today's Business Landscape

Updated: Jun 28, 2023

Introduction: What is ESG and Why is it Gaining Ground?

"Environmental, Social, and Governance" - collectively known as ESG - are three central factors that guide responsible and sustainable investment in businesses. Despite the recent surge in popularity of the term "ESG", it's not a new concept. Rather, it's an outcome of a series of corporate activities and events that have unfolded over centuries. The question - what is ESG - is increasingly finding its place in boardrooms, annual reports, and global conferences. Why ? Because businesses today are recognizing that profit isn't the sole metric of success. Sustainable practices and responsible corporate behavior are equally, if not more, crucial.

What is ESG

ESG Origins:Tracing Back to Ethical Investments

The underpinnings of ESG originated centuries ago, during the 17th and 18th centuries. The genesis of this socially responsible investment can be traced back to religious groups like the Quakers and Methodists. They urged their community members to abstain from investing in activities deemed sinful, such as tobacco, alcohol, and slave trade. This ethical investment philosophy gave birth to the Pioneer Fund, the first ethical mutual fund launched in 1928. This fund marked the inception of a mindset that combined financial goals with moral principles.

The Power of Movements and the Advent of Governance

The period of the 1960s and 1970s witnessed a whirlwind of revolutionary movements across America. These movements advocated for better lives for black people, addressed labor conditions, tackled racism, demanded equal rights for women, and uplifted LGBT activism.

During this time, governance started to gain attention as a key corporate aspect. The seeds of good governance began to sprout in the 1970s with the publication of an essay titled "The Social Responsibility of Business is to Increase its Profits". This essay introduced the Shareholder Value theory. The theory challenged the conventional notion of profit maximization as the sole business goal, asserting that purpose-driven and sustainable operations should also be part of a company's objectives.

Emergence of Environmental Consciousness: Awakening to the Perils

The inception of environmental consciousness in business owes its origins to a 1960 publication, 'The Silent Spring'. The book revealed the harmful effects of pesticides on the environment, acting as a wake-up call to the need for responsible business practices. This gave rise to the environmental movement in America.

To commemorate the movement, April 22nd was recognized as 'Earth Day' from 1970 onwards. Earth Day became a rallying point for individuals and groups raising their voices against environmental degradation, acting as a catalyst for change on a global scale.

Institutionalizing ESG: The Role of Global Initiatives

From these social and environmental movements, the idea of a global framework to govern these initiatives began to take shape. The United Nations General Assembly established the World Commission on Environment and Development (WCED) in 1983 to study and propose long-term solutions for sustainable development.

The culmination of this study was the Brundtland Report in 1987, which subsequently led to the UN Conference on Environment and Development (UNCED) in Rio de Janeiro in 1992. The conference emphasized the need for businesses to align their operations with societal needs.

In 1997, a globally recognized reporting framework, the Global Reporting Initiative (GRI), was launched to promote responsible business practices and provide a comparison metric for organizations worldwide.

What is ESG

ESG Post-Scandal: Striving for Transparency

High-profile corporate scandals in the early 2000s highlighted the need for better corporate governance and increased transparency. The aftermath of these scandals saw the implementation of stringent regulations like the Sarbanes-Oxley Act in 2002 in the USA. These developments emphasized the 'G' in ESG, underscoring the importance of robust governance.

ESG Today: Climate Change, Sustainability Goals, and Corporate Responsibility

In recent years, ESG has taken center stage in corporate discussions. The Kyoto Protocol and the United Nations Global Compact have become key drivers in highlighting the need for corporations to address climate change and adopt sustainable practices. The term "ESG" was first used in a 2004 United Nations report titled 'Who Cares Wins', highlighting the significance of abiding by ESG values.

The Sustainability Accounting Standards Board (SASB) was launched to enhance reporting among companies. The Paris Agreement in 2015 further reinforced ESG by addressing climate change and defining Sustainable Development Goals (SDGs).

Conclusion: The ESG Full Form and its Future

The ESG full form - Environmental, Social, and Governance - carries a rich history, shaped by numerous social and ethical factors over time. As businesses look toward the future, ESG principles are expected to play an increasingly pivotal role. As we unravel what ESG is, it's clear that these values are not just a trend but a testament to the evolution of business priorities - from mere profitability to sustainability and social responsibility

If you would like to know more about Corporate Governanace and would like to be a decision maker click here to visit Directors Institute website.

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