The Evolution of ESG Standards
In the early 2000s, however, investors began to acknowledge that certain environmental, social and governance (ESG) issues that were typically not included in traditional financial analysis materially affected corporate performance and, ultimately, returns to investors. In an effort to formalize certain ESG standards and goals, the United Nations introduced the Principles for Responsible Investing (PRI) in April 2006. PRI is a voluntary initiative in which signatories agree to incorporate six principles into their investment processes6. Additionally, signatories publicly assert their adherence to these six principles through the United Nations’ PRI list of signatories.
Signatories commit to:
- Incorporating ESG issues into investment analysis and decision-making processes.
- Being active owners and incorporating ESG issues into ownership policies and practices.
- Seeking appropriate disclosure on ESG issues by the entities in which they invest.
- Promoting acceptance and implementation of the principles within the investment industry.
- Working together to enhance effectiveness in implementing the principles.
- Reporting on activities and progress toward implementing the principles.
According to the UN Principles for Responsible Investment, there is a growing view among investment professionals that ESG issues can affect the performance of investment portfolios. Investors fulfilling their fiduciary (or equivalent) duty therefore need to give appropriate consideration to these issues. As of March 31, 2018, there were over 1,950 signatories with over $81 trillion in assets under management. Signatories included asset owners, investment managers and service providers7.
While there is no definitive list of ESG criteria that a signatory must evaluate, some example considerations are detailed below:
|Sample Issue||Potential Impact|
|"E" Environmental||Environmental Disclosure & Transparency
|Lower Regulatory & Reputational Risk
Save on Energy Costs
Reduce Environmental Liabilities
|"S" Social||Diversity, Labor & Human Rights Issues
Product Safety & Quality
Community Relations & Philanthropy
|Mitigate Litigation Risk
Create Brand Loyalty
Protect Standing in Communities
|"G" Goverance||Transparent Financial Disclosure
Reasonable Executive Compensation
|Improve Shareholder Relations
Lessen Headline Risk
Dampen Turnover of Personnel