ESG as a concept has existed for about a century, and it has seen a unique actualization over the past three decades, after becoming a part of the corporate governance reports. Although lately it is quite popular to talk about this topic, there is still a need for this topic to be demystified, due to its intricacy and depth.
Exactly 90 years ago, the young Professor Adolf Berle, from the Business School of Columbia University, who today is considered the father of the ESG concept, saw major state-owned corporations as the most powerful entities capable of initiating social change. In 1930, Prof. Berle explains the idea of regulating this aspect of the work of corporations and claims that through the introduction of social responsibility certain social obligations can be imposed on for-profit corporations. From the very beginning, this concept faces general skepticism – whether such social obligations can even be imposed on for-profit corporations, given that the primary objective of shareholders is profit maximization, and this idea is completely contrary to the motives of investors. To realize this idea, Professor Berle begins to promote the role and importance of professional managers in a company, thus reducing the role of shareholders to passive investors. Despite the fact that many at the time believed that this idea reinforced distrust in corporations and led to their massive economic inefficiency, he believed that the regulation of social responsibility should be enhanced proportionally to the growth of profits, but at the same time that corporate law should reflect the reality.
Although the initiative was conceived nearly a century ago, today people still wonder if it is possible to impose “social” obligations on for-profit companies. The changed role of shareholders into passive investors and the managers’ power over resource allocation enables these managers to steer resources toward community priorities. In this way, the influence and thus the pressure of the shareholders if they oppose is reduced. Furthermore, Governments are entrusted with directing this transformation through a variety of legal, formal structures and programs, while businesses and investors play a crucial role in maximizing the prospects.
The term ESG was mentioned for the first time in 2005 in the study “Who Cares, Wins”, and to this day it is estimated that a quarter of the managed assets in the world are aimed at the development of the concept that means Socially Responsible Investments. Ten years later, there are thousands of professionals in the world who carry the title “ESG analysts” and numerous articles in the media on this topic.
Investing in ESG began in 2004 with a letter from the Secretary General of the United Nations, Kofi Annan, sent to more than 50 CEOs of large companies. In this way, Kofi Annan initiates to jointly find a way to integrate ESG in their companies, and accordingly to produce a report that will prove that the acceptance of ESG makes business sense and leads to self-sustainability, but also a healthier society. This move sets the stage for the launch of the New York Stock Exchange’s Principles for Responsible Investment in 2006 and the launch of the Sustainable Stock Exchange Initiative the following year.
The growth and development of ESG investments are not linear nor continuous, despite their quick move into the mainstream. Despite investors’ initial reluctance to embrace the ESG concept on the grounds that their work is focused on maximizing value and profits for shareholders regardless of environmental or social impacts, their interest has shifted in light of mounting evidence that the ESG concept has positive financial implications. Already in 2019, a total of 181 corporations have signed a Statement called “Corporate Purpose”, which commits to adopting sustainable practices, encouraging diversity and inclusion, supporting communities, improving transparency and engagement with stakeholders. At the last meeting in Davos in January of this year, David Solomon announced that Goldman Sachs will no longer list a company on the stock market if it does not have a female or is “different” director.
Apparently, the more things change, the more they stay the same. What is also clear is that Berle’s vision is essentially the new reality in which the Government must lead the way in this transition, but companies and investors must follow this development by creating synergy.
The level of ESG development is one of the indicators of the development of countries and societies, the way they change, but also how the value system adapts to these changes. The big challenge for most corporations is to adapt to this new environment that favors smarter, cleaner and healthier products and services and leave behind the industrial era of pollution, labor considered as a cost and workload as the main strategy determination of companies.
ESG investing has developed to the point where it can significantly accelerate positive market transformation. Acceptance and implementation of the ESG concept provides investors with information on which companies are preparing for the future. For policymakers, ESG refers to development that safeguards the common good against short-term profit maximization, while consumers enforce the need for ESG and influence companies to embrace and apply the concept to more quickly engage in this value chain. ESG standards are a way to measure and assess how companies are doing in fulfilling that important role, and many investors are already looking to include ESG aspects alongside traditional financial analyses in financial statement.