The History of ESG Investing: From Humble Beginnings to Global Impact

The concept of ESG investing has been around for decades, but it wasn't until the 1960s that the modern version began to take shape.

In the 1960s, a group of investors, including the California Public Employees' Retirement System (CalPERS), started to focus on socially responsible investing, which laid the groundwork for ESG investing.

The first socially responsible mutual fund was launched in 1968 by the investment firm, Pax World Funds.

ESG investing gained momentum in the 1990s with the introduction of the Dow Jones Sustainability Index, which measured a company's sustainability performance.

The roots of responsible investment date back to the 19th century, with religious movements like the Quakers and Methodists advocating for issues such as temperance and fair employment conditions.

These early movements laid the groundwork for the concept of ethical investing, which continued to evolve in the early 20th century. The Methodist Church in North America, for instance, started investing in the stock market in the 1900s, with a proviso to exclude companies involved in alcohol or gambling.

In the 1950s and 1960s, the discussion around corporate accountability began to gain momentum, with Howard Bowen's book "Social Responsibilities of the Businessman" published in 1953. This sparked a conversation about the role of businesses in society.

The 1960s also saw the rise of social activism, with movements like black power and women's rights pushing companies and investors to pay closer attention to social issues. Activists even boycotted companies supporting the Vietnam War, urging large funds to cut ties.

By the 1970s, the concept of responsible investment had gained more traction, with the emergence of socially responsible investing (SRI) as a way for investors to align their portfolios with their values. The divestment campaigns against companies doing business in South Africa during apartheid were a key part of this movement.

In 1971, two United Methodist ministers created the Pax World Funds, the first publicly available mutual fund in the US to consider social and environmental factors in investment decisions. This marked a significant milestone in the history of ESG investing.

In 2000, the United Nations hosted the Millennium Summit in New York, where world leaders established guiding principles around topics like human rights, working conditions, and the environment.

The Carbon Disclosure Project (CDP) was founded the same year, encouraging institutional investors to ask companies to report on their climate impact.

The term "ESG" became official in 2004, after its first mainstream appearance in a report titled "Who Cares Wins."

This report illustrated how to integrate ESG factors into a company's operations, breaking down the concept into its three basic components: environmental, social, and governance.

The Principles for Responsible Investment (PRI) was launched in 2006, with 63 investment companies joining, each understanding the management of environmental, social, and governance issues as integral to companies' competitiveness.

The BP oil spill in 2010 was a tragedy that ignited a reevaluation of corporate accountability, highlighting the need for metrics to measure companies' ethical standards.

The European Union's Corporate Sustainability Reporting Directive (CSRD) was established, requiring businesses to report on the environmental and social impact of their business activities, and on the business impact of their ESG efforts.

In the 19th century, the roots of ethical investment can be found among religious movements, including the Quakers and Methodists, who were concerned with issues such as temperance and fair employment conditions.

The first publicly available mutual fund in the US that considered social and environmental factors in investment decisions was the Pax World Funds, launched in 1971 by two United Methodist ministers.

In 1953, Howard Bowen's book "Social Responsibilities of the Businessman" started the discussion of corporate accountability, but it went against the prevailing theory that a company's most important duty was to satisfy its shareholders.

The first inventory of sustainable investments in North America was taken by the U.S. Social Investment Forum Foundation in 1995, revealing a total of $639 billion in assets managed in the US.

The Global Reporting Initiative (GRI) was launched in 1997 to address disclosures by companies related to environmental concerns, and it later expanded its scope to also cover reporting on social and governance issues.

In 1998, John Elkington published "Cannibals with Forks, the Triple Bottom Line of 21st Century Business", introducing the concept of the triple bottom line, a sustainability framework that revolves around the three p's: people, planet, and profit.

The first "Who Cares Wins" report was published in 2004, popularizing the term ESG and providing recommendations for integrating ESG issues in analysis, asset management, and securities brokerages.

Amy Domini, Peter Kinder, and Steve Lydenberg created the Domini 400 Social Index in 1990, which focused on companies prioritizing social and environmental responsibility, and the following year, the Domini Social Impact Equity Fund was launched to test the waters on such investments.

In 2006, six principles advocating institutional investors to incorporate ESG considerations into their decisions were published, and the Climate Disclosure Standards Board (CDSB) was established to create a reporting framework focused on the risks and opportunities posed by climate change.

The Sustainability Accounting Standards Board (SASB) was launched in 2011 to develop accounting rules that reflect the impact of ESG factors on a company's bottom line in a specific industry.

The Global Reporting Initiative (GRI) Standards were introduced in 2016, adding to the formalization of ESG reporting, and the GRI Standards were adopted by 78% of the world's largest 250 companies by 2022.

The United Nations has been a driving force behind the development of ESG investing. The UN's Bruntland Commission was established in 1983 to investigate the connection between human activity and the environment.

The Bruntland Commission's 1987 report catapulted the concept of sustainable development to the forefront of global discourse. This report laid the groundwork for the UN's involvement in ESG issues.

In 1992, the UN Environment Program published the Statement of Commitment by Financial Institutions on Sustainable Development. This marked a significant shift in the financial sector's recognition of its role in fostering a sustainable economy and lifestyle.

The Rio Earth Summit in 1992 saw 154 countries sign the landmark United Nations Framework Convention on Climate Change. This was a major milestone in the global effort to address climate change.

The UN's Global Compact was established in 2000 to promote responsible business practices. It set forth 10 principles for organizations to adopt, covering human rights, labor practices, the environment, and anti-corruption efforts.

The Global Compact's goals are deliberately vague, intended to spark discussions and negotiations through dialogue-specific projects. Participating companies file an annual report on their adherence to the principles.

The UN's Sustainable Development Goals (SDGs) were formulated in 2015, with 17 goals and 169 specific targets. This framework has become a guiding force for companies seeking to align their goals with societal needs.

The European Union's Sustainable Finance Disclosure Regulation was introduced in 2021, requiring funds to describe their sustainable investment objectives and report on their progress. This regulation has helped to standardize ESG reporting across the EU.

The consolidation of sustainability standards is a significant development in the history of ESG investing. In 2022, the International Financial Reporting Standards (IFRS) Foundation created the International Sustainability Standards Board (ISSB) to develop global standards for sustainability disclosures.

The ISSB was formed by consolidating the Climate Disclosure Standards Board and the Value Reporting Foundation, which managed the SASB Standards. This move aimed to create a unified set of standards for sustainability reporting.

The ISSB will oversee the development of new standards, while also managing the SASB Standards. This consolidation is expected to bring greater consistency and clarity to sustainability reporting.

In addition to the ISSB, the U.S. Securities and Exchange Commission (SEC) proposed new rules requiring publicly traded companies to provide climate-related information in their registration statements and annual reports.

In 2017, State Street Global Advisors made a bold move by voting against the chairs of boards with no female directors or candidates, prompting 42 companies to commit to increasing diversity and seven to add women board members.

This decision was part of a larger effort to promote board diversity, with State Street Global Advisors later voting against 400 companies that failed to initiate diversity efforts.

The "Fearless Girl" statue, installed on Wall Street, was a powerful symbol of the push for greater diversity in corporate leadership.

In 2022, Tesla was ejected from the S&P 500 ESG Index.

The decision was made due to a decline in criteria level scores for lack of low carbon energy and codes of business conduct.

Margaret Dorn, senior director and head of ESG indices in North America at S&P Dow Jones Indices, explained the reasoning behind the removal.

Tesla's ESG score had remained fairly stable year-over-year, but it was pushed further down the ranks relative to its global industry group peers.

Claims of racial discrimination and poor working conditions at one factory also contributed to the decision.

Tesla's handling of a National Highway Traffic Safety Administration investigation into 17 injuries and one death linked to crashes involving the company's Autopilot feature was another factor.

In 2017, State Street Global Advisors made a bold move to promote board diversity.

The company, in conjunction with the installation of its "Fearless Girl" statue on Wall Street, sent a strong message to 600 companies in the U.S., U.K., and Australia. It told them that it would vote against the chairs of boards that had no female directors or candidates.

This approach led to impressive results, with 42 companies committing to increasing diversity within a matter of months. Seven of those companies added women to their boards.

State Street Global Advisors followed through on its promise, voting against 400 companies that failed to initiate diversity efforts.

In the 1990s, ESG considerations started to appear in mainstream investment strategies, with the U.S Social Investment Forum (SIF) Foundation taking inventory of all the sustainable investments in North America in 1995, revealing a total of USD 639 billion.

Institutional investors began to recognize that companies could potentially improve financial performance and risk management by focusing on ESG issues like greenhouse gas emissions. This realization led asset managers to develop ESG strategies and metrics to measure the environmental and social impact of their investments.

The Global Reporting Initiative (GRI) was founded in 1997 to address environmental concerns, which soon broadened its scope to also focus on social and governance issues. This marked a significant shift in how companies were being held accountable for their actions.

John Elkington's book, Cannibals with Forks, the Triple Bottom Line of 21st Century Business, published in 1998, introduced the concept of the triple bottom line, a sustainability framework that revolves around the three p's: people, planet, and profit.