Why ESG and what’s is meaning?
The ESG concept dates back to 2004 when then United Nations Secretary-General Kofi Annan called on major financial institutions to discuss how environment, social and governance (ESG) factors could be integrated in capital markets and asset management.
The result was the “Who Cares Wins” conference report released by the International Financial Corporation in 2005. Since then, the concept has evolved to become a cornerstone of the analysis and the processes leading to investments. Furthermore, the notion of ESG has undergone a mainstreaming process well beyond the financial sector.
Although this phenomenon has led to certain drawbacks (e.g., current widespread greenwashing practices) the gradual convergence between ESG financial metrics on the one hand, and a broader understanding of sustainability on the other, illustrates the extent to which thinking has evolved. Not only do ESG standards enable investors to evaluate companies’ performance against the three categories of criteria, but they also equip other stakeholders, citizens and policymakers with the tools to assess the responsibility, commitment and accountability of organisations towards issues ranging from CO2 emissions, biodiversity conservation to corruption or gender equality, to name a few.
ESG issues: focus on ESG Monitor European findings
In this context, SEC Newgate launched a global survey of more than 10 000 people in Europe, the Americas and Asia-Pacific on their opinions on ESG issues – ESG Monitor.
As the findings show, 62% of the respondents in France, Germany and Italy reported a strong interest in the ESG behaviour of governments and corporates, with almost half (48%) agreeing that these issues influence how they act as consumers. Between the three categories, environment ranked most important overall by 57% of those surveyed. Climate change was considered the single most important issue, needing to be urgently addressed by 26% of the respondents.
When it comes to corporate responsibility, three quarters of the sample said companies should do more to look after their employees (76%) and should take responsibility for their supply chains (77%). On how different stakeholders succeed in integrating these ESG aspects into their activities, not surprisingly not-for-profit organisations scored highest (6.1 out of 10 on average), followed by companies and individual people (both 5.5), while governments scored the lowest with an average of 5.3 out of 10.
ESG goals: the European Union agenda
The Brussels hub of SEC Newgate, SEC Newgate EU has witnessed the ever-increasing importance of ESG related issues on the European Union policy-making agenda in recent years. This is highly relevant for anyone wanting to do business within the EU.
In December 2019, the European Commission released the EU Green Deal as a new growth strategy to make Europe the first climate-neutral continent. Since then, a broad range of legislative proposals have been introduced to give consumers, businesses, financial actors and public authorities the tools to better integrate ESG principles in their activities. These include the EU Taxonomy proposal, which will establish a list of environmentally sustainable economic activities to help stakeholders, notably investors, decide where to allocate money.
Moreover, discussions are currently in progress to set up a similar system for activities which substantially contribute to social aspects. In April 2021, the Commission put forward its proposal for a new Corporate Sustainability Reporting Directive, aiming at extending the scope of the current reporting requirements to all large companies through the introduction of EU non-financial reporting standards. Alongside these initiatives, the EU is working on the creation of a voluntary green bond standard, available to both private and sovereign issuers to help scaling up sustainable investments.
On another note, the upcoming Substantiating Green Claims and Empowering Consumers initiatives will respectively set minimum requirements for sustainability logos and labels, and tackle greenwashing by requiring companies to substantiate claims they make about the environmental footprint of their products and services. Finally, the Sustainable Corporate Governance Initiative, expected in December 2021, will oblige companies to take necessary measures to ensure human and social rights in their own operations and value chains through mandatory due diligence and board of directors’ duties.
With ever increasing interest and scrutiny in ESG activity, the ESG concept will continue to evolve. Looking forward, recognition of the complexity of the underlying issues, demand for ever greater granularity and standardisation of metrics means that ESG is unlikely to exist as we know it today. However, regardless of future definition, the broad principles of ESG will continue to have enormous potential to drive sustainability in our economies and societies.
Only time will tell how their use and perception in the community will evolve – and whether ultimately the “who cares wins” mantra is valid. Let’s hope that the mainstreaming trend doesn’t mean these principles become empty buzzwords. In Europe and elsewhere, we need a key set of concepts, strong standards and, where appropriate, supporting policy measures to drive the paradigm shift towards a better future.
The SEC Newgate Global ESG Monitor is a groundbreaking research project across 10 countries that examines how environment, social and governance issues are influencing perceptions of business and governments.