Terms like ESG, diversity, environmental protection or CSR are discussed literally excessively in the world of investments. This is not surprising, since the climate change has arrived at a point that can cause irreversible damage not only to the environment but also to the economy and society. But a decent and professional ESG investment requires certain ESG criteria.
What Is ESG?
Sustainability is complex and requires a set of criteria that are relevant, measurable and comparable at the same time. ESG can be helpful to summarize these criteria which are important in finance and investment management. With the criteria, the ESG aspects bring a uniform structure to the topic of evaluating sustainability.
The three letters in ESG stand for environmental, social and governance. Each of these three aspects has several criteria that are needed to achieve specified goals. These goals should not only help the environment and society. They can also be beneficial for a company and its performance and thus, a good base for a decision about an ESG investment.
The ESG criteria are intended to create transparency. This allows investors to see exactly what a company does for the environment, society and the economy. ESG thus works like a seal of quality with specific guidelines for the claim to sustainability. At least that’s the idea behind it.
The ESG guidelines were agreed in 2015 in the UN Agenda 2030, containing 17 sustainable development goals.
What Does The Agenda 2030 Encompass?
ESG criteria were first mentioned in the 2004 UN working paper “Who cares wins”. The word “care” refers to topics such as climate change, diversity and sustainable economic strategies. With the Agenda 2030, United Nations decided in autumn 2015 on a collectively defined goal for sustainable development. The goal of it, in connection with the Paris climate agreement is to become the daily life and the economy low-emission for the next generations.
The basic idea of Agenda 2030 is that mankind and economy can only develop towards greater prosperity when the environment and climate are protected and the human rights of all people are respected as well. According to this, development should not take place at the expense of the planet or people. This new understanding of wealth goes beyond the financial thinking of income per head. Instead, it is about global access to sustainable consumption as well as clean, affordable energy and poverty reduction. And of course, this requires a transformation of all economies worldwide.
The Agenda 2030 explicitly calls to give priority for the weakest countries and for strong industrialized countries to make more financial and non-financial contributions in sustainable development. With the slogan “leave no one behind”, the Agenda wants to point out that only global action can provide significant changes. This includes every single person up to the ones of the largest industrialized countries.
The 17 goals of the Agenda 2030 are based on five principles which clarify the connections between the goals and underline the core messages of the Agenda 2030.
What Are The Five Principles Of The Agenda 2030?
- People
Many people suffer from poverty, hunger and discrimination. The people principle focuses on human rights, on improving the living conditions of disadvantaged populations and on reducing inequality. - Planet
Achieving fair, reduced consumption for sustainable use of natural resources. This also includes the economical use of seas and oceans. In addition, ecosystems and biodiversity should be preserved. These measures must be implemented to address the climate change. - Prosperity
The economy is the source of prosperity and development. In order to promote sustainable economic growth, everyone must have fair access to the economic, social and technical progress. All employees should have a safe and decent job. Also, the gap between the rich and the poor must not become wider. - Peace
Everyone has the right to live in peace, free from fear and violence. This requires a good governance and inclusive societies in which all human rights are respected. - Partnership
Everyone has to contribute. This is the only way to achieve the goals of the 2030 Agenda. International cooperation should not only take place between countries. Instead, sustainable development must be a goal in every company and for every person.
What do the SDGs say?
The 17 goals are interdependent and can only be achieved together. In other words, they are all dependent on one another. For example, no economic growth can occur if there is no fair access to education or if inequalities persist.
In addition to the five principles, these 17 goals are each assigned to an ESG aspect.
The 17 sustainable development goals (SDGs) are:
Goal 1: No poverty
Goal 2: Zero hunger
Goal 3: Good health and well-being
Goal 4: Quality education
Goal 5: Gender equality
Goal 6: Clean water and sanitation facilities
Goal 7: Affordable and clean energy
Goal 8: Decent work and economic growth
Goal 9: Industry, innovation and infrastructure
Goal 10: Reduced inequality
Goal 11: Sustainable Cities and Communities
Goal 12: Sustainable consumption and production
Goal 13: Climate action
Goal 14: Life below water
Goal 15: life on land
Goal 16: Peace and justice strong institutions
Goal 17: Partnerships to achieve the goals
Who developed the ESG concept?
The Swiss financial analyst and asset manager Ivo Knoepfel prepared the study “Who Cares Wins” for the United Nations I mentioned earlier. In this paper, he first introduced the acronym ESG. Thus, Ivo Knoepfel was at the forefront of developing the sustainability goals and was an advisor to the UN Principles for Responsible Investing Initiative for many years. Now let us, as we have clarified the 17 goals and the 5 principles, finally check the three aspects of the acronym ESG.
What Does “Environmental” Mean?
The human-induced climate change is increasingly damaging our environment. This is also increasing risks for the society and the economy, as environmental disasters and extreme weather events are becoming more frequent. For this reason, the aim of the environmental aspect is to ensure that every person as well as companies and organizations reduce their ecological footprint in order to actively counteract climate change.
The primary objectives are to significantly decrease pollution and emissions of greenhouse gases.This requires a careful resource management, a fair purchase and sale of consumer goods. In addition, the use of renewable energies should be increased.
What Does “Social” Mean?
The S in ESG clarifies the social responsibility towards the society and the economy. For a company, this is primarily about the working conditions of the employees and the cooperation with producers who act human-centered and fairly. On the global level, the “social” is addressing the securing of human rights and the education.
However, the social requirements for sustainable development go even further. Topics such as diversity, gender roles and occupational safety are becoming increasingly important.
What does “Governance” Mean?
At first blush, the governance aspect seems to be a bit abstract. But fact is that the governance is actually the basis for the implementation of the environmental and social aspects. Hence, governance stands for a good management of a company. But what does good mean?
With regard to the 17 goals, the governance aspect is responsible for ensuring that the management develops sustainable guidelines, rules and control processes. This should lead the company in an environmentally friendly, ethically correct and economically interesting direction. The goals of the company should therefore be aligned with those of the environment and society.
Is ESG New To Companies?
Actually as early as 1713, the German (Saxon) accountant Hans Carl von Carlowitz formulated the idea of sustainability in his book on forestry called “Sylvicultura oeconomica“. He stated that only as much wood should be cut down as can regrow. Thus, the term sustainability is originally a forestry one and still has a central meaning today. Since then, a long history has begun in which sustainability has become increasingly important.
The first global environmental conference was initiated by the United Nations in 1972. Already at this conference, 26 principles were developed that show the interaction between economic growth and the consequences for the environment. In 1990, the first stock index was launched which made it possible for investors to invest on the basis of sustainability aspects. It was The Domini 400 Social Index (today known MSCI KLD 400 Social Index).
ESG itself has its origins in socially responsible investing (SRI). As early as the 1960s, the SRI recommended that companies should ban certain business activities from their portfolios. These were, for example, tobacco companies or involvement with apartheid regimes.
After ESG was first mentioned in the UN working paper “Who Cares Wins” in 2004, the investor initiative “Principles for Responsible Investment” (PRI) was founded in 2006. This network of investors is intended to support investors to flow in more sustainability criteria into their decisions. Finally, we come to the year 2015, in which the Sustainable Development Goals (SDGs) were developed and the Agenda 2030 was adopted.
Is One ESG Aspect More Important Than The Other?
The aspect of the environment dominates in public, due to climate change and the environmental damage. But the social aspects are also becoming increasingly important, both for investors and for employees as well. For work-life balance and health at work is receiving increasing attention in the business world.
Ultimately, one aspect cannot be achieved without the other. There must be a base in corporate governance that promotes both social and environmental aspects. Hence, only by observing all ESG criteria significant changes can be made.
How Does ESG Differentiate From Corporate Social Responsibility?
ESG criteria and CSR (Corporate Social Responsibility) have similar goals. Both want to contribute to the sustainable development through ethical and moral management of a company. However, these terms cannot be treated synonymously.
Corporate Social Responsibility (CSR) describes the social responsibility that a company has towards a society. By considering CSR, the company’s activities should lead to a positive influence on the world around it. But CSR only describes the business activities of a company.
The term ESG is a bit broader. It is about both the intrinsic and extrinsic motivation of a company that acts according to ecological and social criteria. These actions should not only have a positive impact on society, but also on the environment and the performance of the company itself.
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