Recent events in global financial markets underscore the importance of transparency, accountability, and a focus on long-term investment horizons over “short-termism”. The crisis also demonstrates that due to economic integration, a crisis in one part of the world can quickly spread to other regions. In the same way, many social and environmental challenges do not respect national borders, placing a premium on an expanded view of risk management to include extra-financial issues.
Indeed, a new term has entered the lexicon of finance: “ESG”, for environmental, social and governance issues. This term and the underlying concept were first proposed by the UN Global Compact’s “Who Cares Wins” initiative in June 2004 as a way of focusing mainstream investors and analysts on the materiality of and the interplay between these issues – be they related to climate change, water, human rights or anti-corruption, to name just a few.
Through such efforts as “Who Cares Wins”, collaboration between the UN Global Compact with International Finance Corporation and the Government of Switzerland, and the United Nations Environment Programme’s (UNEP) Finance Initiative, a new paradigm has emerged – investors and analysts evaluating companies and other assets on their ESG performance as a qualitative and quantitative piece of fundamental analysis. The underlying premise is this: companies that proactively manage ESG issues are better placed vis-à-vis their competitors to generate long-term tangible and intangible results – and therefore are better investment bets. In addition, such an approach better aligns investors’ interests with broader societal goals.
Financial markets have witnessed the development and growth of the Principles for Responsible Investment, an initiative developed by the UN Global Compact and the UNEP Finance Initiative. Launched in April 2006 at the New York Stock Exchange, the PRI invites large institutional investors – both asset owners (e.g. pension funds, endowments) and asset managers – to commit to a set of six principles designed to put ESG issues into the core of investment decision-making.
Taken together, these efforts – in combination with other important global projects such as the IFC’s Equator Principles and the Carbon Disclosure Project – are helping to sensitize capital markets to the importance of ESG issues, and should be a major force in driving the corporate sustainability movement to even higher levels.
Who Cares Wins Initiative
- Future Proof?
- New Frontiers in Emerging Markets Investment
- Connecting Financial Markets to a Changing World
- One Year On
- Communicating ESG Value Drivers at the Company-Investor Interface
- The Responsible Investor’s Guide to Commodities: An overview of best practices across commodity-exposed asset classes
- Introducing GS Sustain (Goldman Sachs Group Inc.)
- Unlocking Value: The Scope for Environmental, Social and Governance Issues in Private Banking
- Principles for Responsible Investment
- Investing for Long-Term Value
- Environmental, Social and Governance Factors… Gaining Momentum in Mainstream Investing . . . or Not? (Report by The Conference Board)
Documents & Standards
- Promoting Corporate Environmental, Social and Governance Policies with National Governments and Investors (Februrary 2008)