The ESG Evolution: A History of Sustainable Development from the 1970s to Today
The importance of corporate sustainability has grown in light of increasing sustainability challenges around the world. As a result, a wider set of practices and reporting strategies have emerged.
Sustainable development, corporate sustainability and environmental, social and governance (ESG) practices have evolved rapidly over the past few decades. As the changes took place, new terminology has been developed to reflect divergences. Here are the waves of influence over how and why reporting and management practices are changing.
The terms ‘sustainable development,’ ‘corporate social responsibility (CSR),’ ‘environment, social, and governance (ESG),’ and ‘climate risk’ address related issues, but they are often used exclusively by different groups of people and different ESG standards and frameworks address their concerns.
At its core, the overarching field of economic sustainability reflects a shift of ideology regarding the role of business entities by mainstream economic thinkers. “Pure” capitalism had been championed by economist Milton Friedman in 1970, who suggested businesses have one responsibility: to pursue profit above all else.
An alternative perspective known as the “triple bottom line” gained popularity in the 1980s and 1990s. It embodies the idea that businesses have social and environmental responsibilities as important as their economic ones.
These responsibilities encompass discrete issues like gender equality or reducing pollution as well as holistic approaches like committing to sustainability improvements over time.
Even though this is a shift that has gained popularity in the past few decades, there are plenty of historical examples showing how organizations have balanced profit with social or other non-financial endeavors or goals.
Robert Owen’s New Lanark Mills in Scotland included social welfare programs during the Industrial Revolution
John Lewis & Partners, a British department store, is an employee-owned mutual organization founded in 1920
The difference between these past examples and today’s approach is an emphasis on reporting progress, collecting data, and creating measurable impacts and value through sustainability initiatives.
Modern Sustainability timeline
18th and 19th centuries: Concerns about finite natural resources started. Questions surrounding sharing wealth and wellbeing to improve the whole of society coincided with the industrial revolution, and the unprecedented economic growth it brought.
1970s-80s - Contemporary corporate sustainability started.
1972 - First UN conference on environmental issues. “Limits of Growth” Club of Rome report published on natural resources and scarcity.
1987 - Brundtland Commission “Our Common Future” report defined sustainable development.
1990s - Companies practiced corporate social responsibility (CSR) to benefit larger society, and investors urged investee companies to become more sustainable through “engagement.”
1992 - Rio de Janeiro Earth Summit:
World leaders adopted Agenda 21, a plan for global sustainable development.
The UNFCCC and Convention on Biological Diversity form.
1997 - Kyoto Protocol (under UNFCCC)
2000 - Millennium Development Goals (MDGs) to be achieved by 2015
Goals included ending extreme poverty, universal primary education, lowering child mortality, improving maternal health, ensuring environmental sustainability.
The goals target needs in poorer countries to be addressed by the public sector, multilateral, and civil society stakeholders.
Nations did not achieve these targets, due to a lack of engagement in the private-sector.
2015 - Paris Agreement (under UNFCCC)
2015 - 2030 Agenda for Sustainable Development
SDGs launched, to build on what the MDGs didn’t achieve.
Include the triple bottom line as their underlying structure: benefiting people, planet, and profit.
Today - sustainability impacts financial institutions, governments, individuals, corporations, and international organizations.
Governments have enhanced regulations linked to sustainable business and investment.
Consumers make choices informed by sustainability considerations.
The global Sustainable Development Goals offer voluntary guiding principles for sustainability across governments and international organizations as well as in the private sector.
Corporations voluntarily publish publicly accessible CSR reports and commitments and align with ESG policies and requests from investors.
Investors and financial institutions use ESG policies relating to investing and lending policies, sustainable finance product offerings, and commitments to align with sustainability goals.
Sustainable development
The original “Our Common Future” definition of sustainable development is: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
Governments, rather than businesses or financial sector entities, primarily use the term “sustainable development.” They use it in the context of sustainability activities, or to the refer to specific policies related to sustainability issues such as the environment or human rights.
Corporate social responsibility (CSR)
Corporations use the phrase “CSR” to describe their corporate reporting policies. The phrase “Corporate Social Responsibility” (CSR) was coined in the 1950s, but became more codified into a set of business practices such as sustainability initiatives and CSR reporting in the 1990s.
One of the first multi-national corporations to produce a CSR report was the oil & gas firm Royal Dutch Shell. It formed an internal social responsibility committee in 1997, and published its first sustainability report in 1998 titled “Profits and Principles—does there have to be a choice?”
CSR reporting is often use to hold companies accountable by journalists to their claims. Companies also face increasing scrutiny for their environmental damages or the depletion of the commons such as fish stocks or other natural resources. Severely damaging practices or incidents leading to death or severe habitat destruction can risk a company’s “social license to operate.”
Climate change risks have growing material impacts on companies, so a stronger set of practices and approaches to addressing climate risk has
Environmental, Social, and Governance (ESG)
A financial industry term covering financial policy discussions, regulation, and financial-sector sustainability. Investors and financial institutions use the term ESG, the acronym for '“environmental, social, and governance” issues, to describe their practices in analyzing and assessing non-financial information.
Investors helped spur the growth of corporate sustainability reporting, due to their interest in corporate sustainability and social responsibility initiatives.
Historically, there are other examples showing how groups have included social or other non-financial considerations into their investment practices:
The Philadelphia Quakers banned investing in slave-trading in the mid-19th century
Sweden’s Ansvar Atkie Fond decided to leave out shares of companies linked to South Africa’s Apartheid regime in 1960. It also excluded shares of companies involved in alcohol sales and gambling.
Contemporary examples of investor shareholder pressure to influence companies to become more sustainable have been termed “shareholder engagement.”
Shareholder activism goes even further than engagement. Investors use activism to stage highly visible rebuttals of corporate strategy in light of climate risks or other ESG issues.
Engine No. 1’s shareholder activism obliged Exxon to replace three of its board members to focus more on the economic transition off oil and gas from an economic perspective.
Tech billionaire Mike Cannon-Brookes used shareholder activism to prevent Australian coal giant AGL from splitting into two companies to continue burning coal.
The term “ESG” was coined in 2005 in a UN Global Compact report. It was used again in the Principles of Responsible Investment, formed in 2006.
Investors use the following ESG resources to assist their assessments.
ESG Data - Data pertaining to ESG is disclosed by companies when requested by external data firms and investors or for mandatory reporting.
ESG Metrics - Data firms and ratings agencies condense ESG data into simple metrics such as scores or ratings used for comparison. ESG scores and ratings may be used to screen companies for particular funds; analyze ESG across investment portfolios, lending policies, or underwriting practices; determine whether to move forward with projects or investments.
ESG Criteria - Financial and investment firms use ESG Criteria to rate or assess different companies or sometimes other entities on their environmental, social, and governance performance.
Environmental criteria include CO2 emissions, water usage, and deforestation
Social criteria include employee treatment, and managers’ relationships with supplier and communities
Governance criteria include company leadership metrics like board composition, executive compensation, risk management, and other internal procedures
Climate risk
Climate risks and climate change issues have impacts for all stakeholders, whether or not they are acting sustainably. It is not merely an ESG issue, which mostly pertains to investor stakeholders.
Climate change impacts are cross-cutting and do not only fall within a sustainability-based definition.
The motivation for addressing climate change risks in corporations may come from consumer pressure, investor ESG requests, or risk reduction frameworks.
With the introduction of climate risk assessment standards like the Task Force on Climate-related Financial Disclosures (TCFD), the emphasis of sustainability shifted.
Mandatory frameworks that have or will likely draw heavily from the TCFD include UK’s mandatory Climate Reporting, the EU’s Sustainable Finance Disclosure Regulation, and the SEC’s upcoming disclosure requirement.
Whereas CSR was seen as a set of activities businesses engage in to demonstrate responsibility as an “add on” or “nice to have” addition, framing sustainability issues as risks helps align the issues more directly with financial materiality and adopt them into mainstream risk assessments.
Viewing sustainability through the lens of risk abatement shifts the focus from an outward to an inward style of sustainability assessment. Oftentimes, investors use both approaches simultaneously in their non-financial or integrated reporting.
Have questions on the links between sustainable development, CSR, ESG, and climate risk? Leave them in the comments.
Sources:
GARP’s SCR Exam Required Reading, Ch. 2 - Sustainability