The history (and future) of ESG investing
Investors have used Environmental, Social, Governance or ‘ESG’ principles for around 3,000 years. In fact, this type of values-based investing can be traced back to the beginning of investing itself.
10 May 2021.
Unbeknownst to many, investors have utilised Environmental, Social, Governance or ‘ESG’ principles for around 3,000 years. In fact, this type of values-based investing can be traced back to the beginning of investing itself.
ESG investing is inherently centred on the “quest for information”.¹ A quest to find out what a company does and whether this aligns with one’s belief system.
Faith and money: the beginnings of the socially responsible investor
Throughout human history, organised religion has been influential in shaping societies’ behaviour. This is also evident when it came to investing. Religious texts instructed followers on how to invest, encouraging a concept of social and community responsibility.
Looking at 3rd century Buddhism, “economic ethics” in the form of attitudes toward wealth, was reflected in the lived-practice of communities’ search for enlightenment. Buddhists cultivated economic equality and distributive justice by living aligned with their beliefs of karma, religious giving (daana), and compassion (karu.naa).²
In Judaism, the Talmud (a 2000 year old record of debates among rabbis about Jewish law) outlines that with investment comes the responsibility to use holdings to prevent immediate and potential harm.³
Fast forward to the 7th century where illegal, exploitative gains made in business or trade are outlawed under Islamic law – a concept known as ‘Riba’.⁴
However, there was still a separation between investing and the rules of the faith: it wasn’t until later in the 18th century, with the emerging influence of the Quakers and the Methodists, that the idea of social responsibility in investing was more firmly established.
Methodists became leaders in many areas of social justice, including prison reform and the abolition of the slave trade, highlighting the connection between commerce and social good.
Founder and Methodist Minister John Wesley, stated: “we ought not to gain money at the expense of life, nor (which is in effect the same thing) at the expense of our health. Therefore, no gain whatsoever should induce us to enter into, or to continue in, any employ, which is of such a kind, or is attended with so hard or so long labour, as to impair our constitution.”⁵
Similarly, in an early example of a ‘negative screen’ the Quakers suggested that ‘no money should be made from war or slavery.’
Growth in socially responsible investing spurs demand for transparency
The ability to make responsible or ethical investment choices is dependent on access to information. In the past, this information was only available to those with the resources and inclination to seek it out – such as William Cadbury commissioning investigators to travel to Portuguese West Africa to investigate slavery claims in the early 1900s.
Demand for socially responsible investment (SRI) grew in the 1980s in response to issues such as apartheid in South Africa and the nuclear disaster in Chernobyl. This lack of transparency came to a head in 1989 when the Exxon Valdez spilt 10.8 million gallons of oil in the Prince William Sound off the coast of Alaska: the largest spill ever in the U.S.
As a result, environmental activists didn’t just move to clean up the spill, they moved to prevent it from ever happening again. This brought about investor focused activist groups whose primary goal is to drive companies to be transparent: disclose their activities, operations and be accountable for them.
We could say that the ESG data available today was largely born out of efforts by socially responsible investors to respond to the Exxon Valdez tragedy.
By 1995, SRI had grown to fifty-five mutual funds with $12 billion in assets under management.⁶
In that period, a number of mutual funds and indices were also born such as the KLD 400 Social Index – an index tracking 400 publicly-traded companies in the United States known for socially responsible investing. This index has slightly outperformed market cap indices for over thirty years.
Setting standards and the push for accountability
In 1997, in response to the Exxon Valdez, two non-profit organisations with involvement in the UN Environment Programme, CERES and Tellus Institute, created the first accountability mechanism in the history of corporate disclosure, the Global Reporting Initiative (GRI). This was to ascertain whether companies adhere to responsible environmental conduct and accepted global norms. The GRI later broadened to include economic, social and governance (ESG) considerations. ⁷
Since the launch of the GRI, several other standards emerged in the following decade, including assurance standards, the International Integrated Reporting Framework (IR), the Sustainability Accounting Standards Board’s materiality framework and the CDP (formerly the Climate Disclosure Project), to name a few.
Today, these frameworks are now well known by responsible investors. A further harmonisation of ESG definitions is well under way with the International Financial Reporting Standards foundation (IFRS) committing in March 2021 to establish a sustainability reporting standards board (SSB).
The future of ESG
In the 2000s, ESG investing evolved from an exclusively values-based approach to a more systematic analysis of ESG considerations and their integration in investment decision making processes.
The latter is called ESG Integration and is primarily aimed at reducing risk exposures and possible reputational damage, resulting from ESG considerations material to specific companies and sectors.
The demand for SRI funds and the growth of this ESG integration continues to amplify apace. Looking at Australia, the tragic summer bushfires of 2020, combined with the COVID-19 pandemic, has also contributed to greater consumer awareness and a shift in preferences.
Furthering this, a 2021 survey conducted by the Chartered Financial Analyst (CFA) Institute reveals that 85% of CFA Institute members surveyed now take E, S and/or G factors into consideration in their investing, up from 73% in 2017.⁸
According to U Ethical ethics and impact manager Désirée Lucchese: “the future of ESG investing is about ensuring authentic corporate responsibility of portfolio companies and understanding investment risks and opportunities through a multi-dimensional lens.”
“Integrating purpose into investment is about ensuring companies are committed and can deliver shared value to a broader set of stakeholders while safeguarding the very sources of sustainable return: a stable climate and a peaceful society where businesses can thrive.
“Nobody wins in a failing society,” she notes.
Chief executive officer Mathew Browning explains that U Ethical’s investment process has always been aligned with an ESG lens—from the inception of its first funds in the 1980s to the independent, forward-thinking investment manager it is today.
“Our investment team continually evaluates the companies in which we invest. As an ethical investment manager, not only do we seek symbiotic relationships with clients whose belief systems align with our progressive contemporary values, we also manage risk stringently while generating competitive long-term returns and value.”
To learn more about where we see the future of ESG investing and how you can create a socially responsible investment portfolio, please contact our relationship management team here.
References:
¹ MSCI ESG Podcast - https://www.msci.com/esg-now-p...
³https://sojo.net/articles/disi...
⁴https://www.investopedia.com/t...
⁵http://abolition.e2bn.org/peop...
⁶https://www.msci.com/documents...
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