Nov 06, 2023 11:57:22 am
Manhajul Islam, S. Ak - BATS Consulting
Environmental, social, and
governance (ESG) is a set of standards used by socially conscious investors to
assess company behavior and screen potential investments. ESG comprises three
main pillars: environmental, social impact, and corporate governance.
Why is ESG Important?
ESG plays a crucial role in
identifying sustainable and responsible companies, encouraging them to act
responsibly. It also helps monitor companies to prevent involvement in risky
and unethical practices.
The Origins of ESG
The concept of ESG first
emerged in the 1960s when awareness of socially responsible investing began to
grow. Two main factors contributed to this development: worsening environmental
degradation and increasing awareness of social rights.
In the subsequent years,
movements supporting greenhouse gas emissions limitations and climate change
mitigation gained traction. In this context, ESG started to be applied to
business issues.
The Evolution of ESG
In 1992, the United Nations
held the Earth Summit in Rio de Janeiro, Brazil, to commemorate the 20th
anniversary of the First Conference on the Human Environment in Stockholm,
Sweden, in 1972. This conference became a significant milestone in addressing environmental
issues.
Following that, the
Conference of the Parties (COP) has been held annually since 1995, becoming one
of the worlds largest climate conferences. This movement also contributed to
the popularity and framework of ESG.
In 1997, the Kyoto Protocol
was agreed upon, mandating countries to reduce greenhouse gas emissions to
combat global warming.
In 2006, the United Nations
introduced the Principles for Responsible Investment (PRI), aiming to
understand the investment implications of ESG factors and promote sustainable
investing.
Oil Spills and
Accountability
In 2010, BPs oil spill in
the Gulf of Mexico, the largest marine oil spill in the history of the oil
industry, shook the world. This incident raised serious questions about the
need to implement an ESG framework for companies.
Communities affected by the
oil spill felt that BP lacked accountability, and no ESG metrics indicated that
the company operated in line with internal ethical standards. This prompted the
establishment of the Sustainability Accounting Standards Board (SASB) in 2011
to develop sustainable financial information.
SDGs and ESG
The year 2015 marked a
significant turning point in the development of ESG. The United Nations adopted
the Sustainable Development Goals (SDGs), consisting of 17 sustainable
development objectives. ESG issues became a key part of the SDGs discussion.
In the same year, the Paris
Agreement was ratified to limit global temperature rise to below 1.5 degrees
Celsius. After a long journey since 1992, this push gave rise to the ESG
framework.
The ESG framework allows
companies to be more accountable and transparent to stakeholders. There are
three main pillars in ESG: environmental, social, and corporate governance.
These pillars assess how companies maintain the environment, manage relationships
with various parties, and ensure good governance.