Environmental, Social, and Governance

 Environmental, Social, and Governance

ESG stands for Environmental, Social, and Governance — three key factors used to assess how a company or organization operates in a sustainable, ethical, and responsible way beyond just financial performance.

Evolution of ESG in Business and Finance

1. Origins (1960s–1990s): Roots in Ethical Investing

• 1960s–70s: Investors began avoiding companies involved in tobacco, weapons, or apartheid-era South Africa (known as socially responsible investing or SRI).

• 1980s–90s: The concept of corporate social responsibility (CSR) grew. Companies started reporting on social and environmental impacts, but mostly voluntarily and without standardized frameworks.

2. Early 2000s: ESG Takes Shape

• The term ESG was formally introduced in the 2004 UN Global Compact report “Who Cares Wins”, which emphasized the integration of ESG into capital markets.

• The UN Principles for Responsible Investment (PRI) launched in 2006, gaining major institutional backing and encouraging ESG-aligned investing.

3. 2010s: Mainstream Adoption

• ESG investing gained traction among asset managers, pension funds, and regulators.

• Frameworks like GRI, SASB, TCFD, and CDP were developed for ESG reporting.

• Companies began seeing ESG as a source of risk management, brand value, and competitive advantage.

4. 2020s: Acceleration and Regulation

• The COVID-19 pandemic, climate disasters, and social justice movements increased demand for corporate accountability.

• ESG investing became a $40+ trillion industry globally.

• Regulatory momentum: the EU Taxonomy, SFDR, ISSB standards, and SEC climate disclosure proposals reflect growing governmental oversight.

• Critics also raised concerns about greenwashing and lack of ESG standardization, pushing the field toward more robust and transparent frameworks.

Importance of ESG in Business and Finance Today

1. Risk Management

• ESG factors help identify non-financial risks (e.g., climate change, labor disputes, supply chain ethics) that can become financial risks.

• Example: A company ignoring environmental laws may face fines, lawsuits, or reputation damage.

2. Value Creation

• Strong ESG performance can lead to:

  • Lower cost of capital

  • Greater employee satisfaction and retention

  • Improved customer loyalty

  • Innovation in sustainable products/services

3. Investor Demand

• Investors increasingly demand ESG disclosure.

• ESG-focused funds often outperform traditional funds over the long term (though this is debated).

• Institutional investors, such as BlackRock and Vanguard, now require ESG transparency from portfolio companies.

4. Regulatory Compliance

• ESG is no longer optional. Regulatory bodies globally are moving toward mandatory ESG disclosures, especially on climate risk.

• Companies unprepared for ESG regulations face potential legal and financial penalties.

5. Long-Term Sustainability

• ESG encourages businesses to focus on long-term value, not just short-term profits.

• This aligns corporate strategy with planetary boundaries, social equity, and good governance, which is essential in an era of climate and social crises.

P.Sukumar

K.Jagadeesh

III B.Com