Environmental, social and governance (ESG) is a discipline that has been around for many years, particularly in European countries, but U.S. companies have only recently started to take notice and implement good ESG practices. Over the past several years, ESG has grown in importance, due to major groups supporting the movement, emerging themes in business, and environmental and geopolitical events that warrant attention.
“It’s a huge evolution,” said Danielle Chesebrough, a senior analyst for Global Compact and Principles for Responsible Investments at the United Nations. Chesebrough also noted that people used to look at ESG from a risk perspective, and are now looking at the opportunities ESG presents.
“[ESG] has emerged as a discipline in and of itself,” said Nasdaq’s Head of Sustainability Evan Harvey. “It is everything that’s not on the balance sheet; it’s everything that’s not in the Q or the K [filings].”
To explain the momentum behind ESG in recent years, Harvey outlined the three main factors that have brought it into the mainstream.
The rise of the number of institutional investors that view ESG topics as a source of insight and value has been vital for the growth of sustainable investing. Institutional investors are increasingly baking ESG considerations, such as corporations’ efforts to reduce their carbon footprint and companies’ financing of environmentally-friendly projects, into their algorithms and valuation process because they find that there are greater returns, Harvey noted.
Companies are also disclosing more about their ESG efforts, not only because some feel a heightened sense of responsibility when it comes to what they are doing for the surrounding communities, but also because highlighting ESG initiatives allows them to talk more about their intangible assets and brand value.
Regulators are starting to take notice of ESG topics as well, particularly in the European Union and Asia. For years, the Nordic and Baltic regions led the world in sustainable investing practices, but now they’re spreading across the globe. Harvey noted that while the U.S. has done little in terms of ESG disclosure and regulation, there is a “coming wave.”
Meanwhile, non-government organizations (NGOs) are increasingly getting involved in ESG matters. The United Nations is trying to improve markets by promoting disclosure. The organization has created 17 sustainable development goals as a blueprint, establishing objectives such as eliminating poverty and hunger and improving education and gender equality.
Younger generations have also become keenly aware of the environmental crisis presented by climate change. With severe weather threats emerging – from wildfires to hurricanes to melting ice caps – millennials have shown greater interest in working for companies that are environmentally and socially conscious.
Themes such as the emergence of big data and new management styles have further propelled the discipline of ESG.
Through big data, companies can better track their efforts on ESG initiatives, such as measuring gender and wage equality and reducing waste. Harvey acknowledged that more data is being included in corporate and investing strategies.
More companies are also incorporating ESG considerations into their human capital management practices, creating volunteer organizations or employee-networks, and their supply chain operations, requiring suppliers to meet certain environmental standards.
One reason that companies are taking on ESG initiatives recently is that more CEOs are willing to be advocates for implementing better governance within their company, enhancing its environmental efforts and creating a more inclusive workplace.
Because these objectives evolve over time, the ESG discipline emphasizes the importance of long-termism, encouraging companies to plan years in advance, rather than focus on short-term goals.
Extraneous events, from severe storms to financial crises, are bringing ESG into the mainstream.
Severe weather threats in recent years have seemingly grown in scale and devastation, increasing the urgency for actions to mitigate harmful behaviors to the environment and implement new, cleaner exercises. Some are even concerned about a budding energy crisis, caused by civilization’s current dependence on finite resources until viable sources of renewable energy are further developed.
Globalization has also created a more connected world, meaning companies across the globe are now more closely linked. This geopolitical environment is part of why the U.S. Housing Crisis in 2008 became a global financial crisis, but, hopefully, companies are now heeding the lessons about disclosure, noted Harvey.
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