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An ESG Primer: Drivers and evolution of sustainability movement
By Edward Olson Leader, Environmental, Social, & Governance
It seems like everywhere you look, you see Environmental, Social, and Governance (ESG) principles being discussed and transforming the way business is done. If I could describe it in a very succinct way, it is that ESG is a cluster of non-financial factors that have a real financial impact.
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- ESG allows you to evaluate the sustainability, ethics, and responsibilities of your organization through three central pillars.
- Since the 1990s, stakeholders have become increasingly focused on how different organizations stack up from an ESG perspective.
- Organizations that ignore ESG could face consequences like limited access to funding, negative feedback from customers, and a decline in employee recruitment and retention.
What is ESG?
Environmental, Social, and Governance is a framework to assess the three central factors in measuring and assessing the sustainable, responsible, and ethical structure of an organization. In considering ESG you need to look at where you operate, what you sell (the goods and services), and the stakeholders that are impacted within that sphere of influence including both up and down the actual supply chain itself. The three framework pillars are:
Environmental
The first pillar of ESG is environmental. This encompasses how an organization is exposed to and manages risks and opportunities related to climate and natural resource scarcity, pollution waste, and other environmental factors.
Social
The second pillar, social, focuses on an organization's values and business relationships. For example, social topics include labour and supply chain standards, employee health and safety product quality and safety, diversity equity and inclusion policies, and efforts on privacy and data security.
Governance
The last pillar is governance. This is where we incorporate information on the structure and diversity of the board of directors, executive compensation, critical event responsiveness, and corporate resiliency. This area includes policies on lobbying, political contributions, bribery and corruption.
A Brief History of ESG
To get to where ESG is at today, you need to look at where it has evolve from. Prior to the 1970s, shareholder primacy was the foremost thought at the time. It was the fundamental reason for a company's existence, but the '70s introduced this idea of social contract and the concept that there is more than just the shareholder that a company needed to keep in mind.
In the '90s, we moved forward and defined the triple bottom line. Three distinct topics that were identified that were a way to evolve the idea of idea of social contract as financial, social, and environmental. This is where things took an interesting twist. These were meant to be three equal parts, but the approaches really remained more of a marketing tool that allowed businesses to make these grand gestures and yet also allowed corporate inaction to take root.
The ESG movement started its current rise to dominance back in 2005. It came on stream for businesses that needed to measure the real sustainable and societal impacts of their outputs. The critical difference was now that ESG was measured. It is quantifiable and criteria-led, allowing businesses to fully integrate better those environmental, social and governance strategies into their core DNA.
Over the next decade, with the confusion around all the standards and frameworks that are globally being accepted there was a need to come back to this idea of some grounding forces, or a baseline from what to work from. All of these came back to the idea of what the United Nations put together in 2015 with the sustainable development goals.
These 17 goals really do underlie the foundational principles for all global sustainability approaches and it was a universal call to action. It was a way to end poverty, to protect the planet, and strive for all people enjoy peace and prosperity by 2030.
Evolution of Sustainability
1970s - Corporate Social Responsibility (CSR)
Began when the Committee for Economic Development announced the concept of social contract between business and society in 1971.
1994 - Triple Bottom Line
Companies should prepare three bottom lines:
- The bottom line
- The people account
- The planet account
2005 - ESG
First coined in 2015 "Who Cares Wins" study by the UN Global Compact, which concluded that better investment leads to sustainable societies.
2015 - UN Sustainable Development Goals (SDG)
The UN set 17 sustainable goals that encourage "companies to adopt sustainable practices and reporting".
Drivers of ESG Change
The drivers of ESG change and real and consequential. For example, if you rely on capital, the United Nations Environment Program Finance Initiative created the Principles for Responsible Banking in 2019. It has been adopted by more than 206 banks, representing more than 1.6 billion customers worldwide and 40 percent of the global financial assets and growing. The focus is to drive change via the banking community through a positive contribution to people on the planet that society expects.
Similarly, investors, whether individually championed or through asset managers like BlackRock, are increasingly disposed to vote against management and board of directors when they see those companies are not making sufficient progress on sustainability-related disclosures. It's more than just words, they actually have voted against or withheld votes from 800 directors at over 2,700 different companies now.
These are just a few of the many emerging drivers businesses are required to consider:
- BANKING & INVESTORS: Access to and deployment of capital, including cost of capital.
- GOVERNMENT: Public policy to influence action by organizations to reduce carbon footprint, including conditions associated with pandemic relief funding.
- REGULATORS: Embedding sustainability measures in regulatory decisions and approvals for new projects/capital deployment.
- CUSTOMERS: Greater activism by customers impacting with whom they do business, including whom they influence through social media.
- SUPPLY CHAIN: Influencing participants within the full business cycle – upstream and downstream.
- ACCOUNTING STANDARD SETTING BODIES: Evolving from guidance for enhanced adoption of sustainability criteria to mandatory reporting.
- SECURITIES COMMISSIONS: Driving expectations for standard disclosures across all publicly listed entities with a focus towards integrated reporting.
- EMPLOYEES: Attraction and retention of skilled workers linked to corporate positioning on sustainability issues across the ESG spectrum.
Supporting your journey to sustainability
ESG is not a destination, but an iterative and ongoing process that your business must embrace over its entire lifecycle. To realize the advantages requires a commitment to continuously invest in, manage, and monitor ESG efforts. No matter where you are on your ESG journey, our team can assess your initiatives and help you move toward maturity. To get started, contact Edward Olson, Leader, Environmental, Social, and Governance.