ESG: The big picture, 3 critical turning points
In this three part series, ESG: The big picture, we cover (i) how we got here, by exploring three defining turning points of ESG; (ii) where we are now, outlining the triple risks the ESG sector is facing; and (iii) where we are heading, mapping three ESG priorities coming soon to a zoom screen near you. We’ll use the Pace-Precision framework throughout this series to illustrate ESG’s development over time and trade-offs.
Here, we explore the three major turning points in ESG’s development that have created the sector we have today.
Turning Point 1: Let my people go surfing
Businesses have been considering their ESG impacts for centuries, albeit without the branding. From the cooperatives of the Cadbury family in the UK in the early 1900s, to companies engaging in boycotts and divestments of South Africa companies during apartheid regime of the 1970s and 1980s, notably General Motors, businesses have a long history avoiding harm and delivering benefit to the environment and society.
Until the late 1990s, much of this activity was quiet and without ceremony. Companies like Patagonia, founded in 1973, were delivering fully on ESG and sustainability outcomes for decades because they believed it was the right thing to do, with “on-site childcare center—at the time one of only 150 in the country” ¹, a culture of supporting work-life balance (the Founder, Yvon Chouinard’s, directive “let my people go surfing” has become famous) and a commitment to creating environmentally conscious clothing that was made to last.
These activities were generally operating without access to data and best practice sharing, meaning that these opportunities were not scaled and monitored in a harmonised and consistent way. As such, despite pockets of excellence, activities overall were generally imprecise and not focused necessarily on those that were most material. Additionally, the limited scale and lack of media attention meant that the pace of progress toward ESG and sustainability goals was slow.
Turning point 2: ESG considerations deemed legally permissible and arguably required
From the late 1990’s and early 2000s, ESG and sustainability activities started to become integrated, with data collection, best practice sharing and a discussion in mainstream media about the role businesses can play in social goals. In 2005, a report from Freshfields found that consideration of ESG and sustainability outcomes could even be part of the fiduciary responsibility of a company director. The report, commissioned by the United Nations Environment Programme Finance Initiative provided an interpretation of the law from several western democracies (the US, UK, France, Germany, Spain and Italy amongst others) with respect to investors and ESG issues. The Freshfields report concluded that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions”. The report also suggested that where the financial value of investments were deemed comparable, investors could use ESG considerations to decide which investment strategy to pursue.
After this, there was a gradual but significant shift in the availability of data on ESG outcomes, research into materiality, creation of resources, standards and mechanisms for sharing best practice, and familiarity with frameworks that make delivering activity that create ESG and sustainability outcomes effective. This movement has surfaced rigorous, transferable and transparent data demonstrating both the harm that business activity can cause to ESG outcomes, and also the possibilities for positive contributions to society. For the most part, activities were driven by material significance and the lack of media attention meant that perverse incentives were limited as pressure to engage in politically popular but insignificant activities were low. Therefore in this phase, although the pace of progress was still relatively slow, the activities being delivered were increasingly precise and with no risk of Greenwashing, and the institutions supporting coordination were established, albeit with scope for further development.
Turning Point 3: ESG - One term to rule them all
Until recent years, there were many terms which all imply similar concepts; ESG, sustainability, “green”, triple bottom line, corporate social responsibility; the list goes on. John Elkington’s Triple Bottom Line introduced the consideration of people, planet and profit for business, which “differs from traditional reporting frameworks as it includes ecological (or environmental) and social measures that can be difficult to assign appropriate means of measurement”.² Although Triple Bottom Line is not used in popular discourse, the ESG movement has arguably been built on its principles. Equally, Corporate Social Responsibility and related concepts like Whole Food Founder John Mackey’s Conscious Capitalism were important early drivers of businesses considering the full impact, positive and negative, of their actions.
However, Google trend analysis of these terms paints an interesting picture; although sustainability is the most used term throughout the last 17 years that Google has been collecting this data, in recent years, the usage of ESG has increased exponentially, more than doubling in the 15 months from December 2019 to March 2021³ and is now almost on par with the popularity of sustainability.
As such, in 2021 almost all large, and many small to medium sized, companies have a ESG and sustainability strategy. Sebastian Miller, Principal at Pioneer Partners, believes that ESG considerations are now pervasive across all investment portfolios, although competitive financial returns still remain crucial. Teaming this with the appetite we see from millennials and gen-z for more sustainable products, it seems clear that ESG is here to stay.
FOOTNOTES & LINKS
1 Patagonia (2021) Our Company history. https://eu.patagonia.com/es/en/company-history/ Last accessed 26th March 2021.
2 Slaper, T.F. and Hall, T.J. (2011) The Triple Bottom Line: What Is It and How Does It Work? http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html Last accessed 23rd March 2021.
3 Data captured on April 1st, 2021 covering the period from 2004 – present for search terms “ESG”, “sustainability”, triple bottom line” and “corporate social responsibility”, for worldwide data. Please note when broken down for the US, the UK and large western European economies, the trends followed the worldwide results, with no notable disparities.