Environmental, Social and Governance

Environmental, Social and Governance
Name	Environmental, Social and Governance
Abbreviation	ESG
Type	Framework
Introduced	2000s
Fields	Sustainability; Corporate responsibility

Environmental, Social and Governance

Environmental, Social and Governance is an evaluative framework used to assess organizational conduct across environmental stewardship, social responsibility, and governance practices. Originating in the early 21st century, it intersects with corporate disclosure, investor stewardship, and regulatory initiatives across multinational firms, financial institutions, and supranational organizations.

Overview

ESG practices inform decisions by asset managers, sovereign wealth funds, pension funds, credit rating agencies, and development banks. Prominent actors that engage with ESG include BlackRock, Vanguard Group, State Street, Norwegian Government Pension Fund Global, and California Public Employees' Retirement System. ESG debates involve standards and guidance from bodies such as International Organization for Standardization, International Financial Reporting Standards Foundation, Securities and Exchange Commission (United States), European Commission, and United Nations Principles for Responsible Investment. NGOs and advocacy organizations such as Greenpeace, Amnesty International, World Wildlife Fund, Human Rights Watch, and Transparency International also shape discourse. Academic research institutions like Harvard Business School, London School of Economics, Stanford University, University of Oxford, and Massachusetts Institute of Technology produce empirical studies on ESG outcomes. Key firms providing ESG data and ratings include MSCI, Sustainalytics, Refinitiv, Bloomberg LP, and S&P Global.

History and Development

Early antecedents trace to socially responsible investing practices promoted by Quakers, Seventh-day Adventists, and faith-based investors like US Conference of Catholic Bishops. The modern ESG term gained prominence with reports and initiatives from institutions such as United Nations Environment Programme Finance Initiative, Global Reporting Initiative, and the UN Global Compact. Notable events shaping ESG include corporate scandals involving Enron, WorldCom, and regulatory responses from Sarbanes-Oxley Act proponents and investigators linked to Securities and Exchange Commission (United States). Financial crises involving Lehman Brothers and policy responses from International Monetary Fund and World Bank accelerated attention to nonfinancial risk. Landmark agreements and summits including the Kyoto Protocol, Paris Agreement (2015), and COP26 conferences influenced environmental metrics, while human rights frameworks like the Universal Declaration of Human Rights and instruments from International Labour Organization informed social criteria.

Framework and Components

Environmental criteria often encompass climate risk, emissions, resource use, and biodiversity considerations influenced by scientific assessments from Intergovernmental Panel on Climate Change, conservation initiatives like Convention on Biological Diversity, and regulatory regimes such as Clean Air Act-era jurisprudence and directives from the European Chemicals Agency. Social criteria include labor standards, community relations, and supply chain practices shaped by instruments like the Modern Slavery Act (UK), standards from International Labour Organization, and case law involving companies such as Nike, Shell plc, and Walmart. Governance criteria cover board composition, executive pay, shareholder rights, and anti-corruption measures referenced by laws such as the Foreign Corrupt Practices Act and policies promoted by OECD corporate governance principles. Corporate practices and commitments are often communicated through channels linked to Dow Jones Industrial Average constituents, multinational conglomerates like General Electric and Siemens, and resource companies including ExxonMobil and Rio Tinto.

Measurement and Reporting Standards

Reporting frameworks and standards used in ESG disclosure include guidance from Global Reporting Initiative, the Sustainability Accounting Standards Board (now integrated with IFRS Foundation matters), the Task Force on Climate-related Financial Disclosures, and regional mandates from bodies like the European Securities and Markets Authority. Rating agencies and index providers such as MSCI, S&P Global, FTSE Russell, and Morningstar translate disclosures into scores used by investors including CalPERS and sovereign investors like Government Pension Fund of Japan. Verification and assurance roles involve firms like the Big Four accounting firms—Deloitte, PwC, KPMG, and Ernst & Young—as well as standards setters like American Institute of Certified Public Accountants. Public policy actions from entities such as European Commission’s Directorate-General and national regulators including the Financial Conduct Authority and BaFin influence mandatory reporting timelines.

Market Adoption and Investment Impact

Institutional adoption spans asset managers, index funds, and private equity players including BlackRock, Vanguard Group, KKR & Co., The Carlyle Group, and Apollo Global Management. Green financing instruments such as green bonds, social bonds, and sustainability-linked loans are issued by banks like HSBC, Deutsche Bank, and BNP Paribas. Exchanges including New York Stock Exchange, London Stock Exchange, and Tokyo Stock Exchange list ESG-focused products and indices sponsored by MSCI and FTSE Russell. Impact investing ecosystems involve intermediaries such as Rockefeller Foundation, Bill & Melinda Gates Foundation, Ford Foundation, and development finance institutions like European Investment Bank and International Finance Corporation. Research by economists at National Bureau of Economic Research and policy analyses from OECD examine performance correlations between ESG scores and financial returns.

Criticisms and Controversies

Critiques come from commentators and institutions including The Economist, scholars at American Enterprise Institute, and legal challenges in courts such as the United States Court of Appeals regarding fiduciary duties. Controversies include accusations of greenwashing exposed in investigations by Reuters, The Wall Street Journal, and regulatory inquiries by the Securities and Exchange Commission (United States) and European Commission. Conflicts arise between activist investors like Engine No. 1 and corporate boards at firms such as Chevron and ExxonMobil. Debates over divestment strategies involve public funds including New York State Common Retirement Fund and national pension schemes like Canada Pension Plan Investment Board. Political disputes feature interventions by governments including United States Department of Labor, Chinese Ministry of Ecology and Environment, and policy statements from leaders like Joe Biden and Angela Merkel.

Regional and Sectoral Variations

Regional approaches differ across jurisdictions such as the European Union, United States, China, India, and Japan, with supranational coordination through bodies like the United Nations and trade forums including the World Trade Organization. Sectoral differences manifest between extractive industries exemplified by BP and Rio Tinto, financial services including Goldman Sachs and JPMorgan Chase, technology firms like Apple Inc., Alphabet Inc., and Meta Platforms, Inc., and consumer goods companies such as Procter & Gamble and Unilever. City-level and municipal initiatives from New York City, London, Shanghai, and Singapore interact with national policies and corporate strategies. Industry associations including International Council on Mining and Metals and Institute of International Finance provide sector-specific guidance and standards.

Category:Sustainability