Companies have much to gain from implementing ESG practices, but how did it all start? Here's a quick overview of the chain of events that culminated in the development of ESG frameworks
Environmental, social, and governance (ESG) performance reporting according to ESG frameworks has become a common practice for organizations globally. With natural disasters increasing and the visibility of inequalities rising, it’s never been more important for corporations to take a stand on the issues that matter to their audience and the organization’s longevity.
ESG reporting by ESG frameworks allows companies to be held accountable and maintain transparency. As a company’s ESG efforts often correlate to the company’s stock price, investors aiming to make impactful and ethical investments and potentially increase financial returns can use ESG frameworks to benchmark and screen pending investments.
A company’s ESG efforts focus on three areas:
ESG reporting discloses these data points to cover business operations relating to a company’s ESG issues. It’s all about accountability — ESG frameworks show how sustainable one business is compared to another.
This article discusses the history of ESG to better understand why ESG frameworks came into place and the value of prioritizing accountability.
While socially responsible investing (SRI) was on the rise as early as the 1960s due to increased environmental degradation and social rights awareness, ESG frameworks weren’t developed until 1992. That year, the United Nations (UN) hosted the first-ever Earth Summit in Rio de Janeiro. At the summit, 154 countries signed the legally binding United Nations Framework Convention on Climate Change (UNFCCC), an international environmental treaty.
This unprecedented global movement to curb greenhouse gas (GHG) emissions and prioritize mitigating climate change brought ESG issues to the forefront of business. It highlighted the need for the long-term health of the global population to be the focus of corporate audits.
After the initial Earth Summit, the Conference of the Parties (COP) began meeting yearly to check in on pledges and progress made by the signatories of the UNFCCC. This environmental-impact-focused movement engendered several events that contributed to the popularity of ESG reporting frameworks.
In 1997, the Kyoto Protocol was created to push governments to reduce GHGs to combat global warming. A total of 192 countries pledged to set individual targets to limit and reduce GHG emissions. This treaty would go into effect eight years later, in 2005.
In 2006, the UN developed the Principles for Responsible Investment (PRI). The goal of the PRI was to understand the investment implications of ESG factors and to promote sustainable investments that account for ESG issues.
This push for accountability and sustainability from larger corporations was tested in 2010 when the largest marine oil spill in the petroleum industry’s history occurred.
The BP oil spill in the Gulf of Mexico was approximately 8–31% larger in volume than the previous largest oil spill, which occurred in the same place. The tragedy took 11 lives and injured 17 others.
This incident sparked enthusiastic conversations about implementing an ESG framework for all organizations. Affected communities felt there was nothing to hold BP accountable, no ESG-related metrics to show the company had operated against internally set ethical standards.
To begin the process toward increased transparency, the Sustainability Accounting Standards Board (SASB) was established in 2011 to standardize financial material sustainability information disclosure.
By 2015, ESG issues were front and center as the UN set ambitious Sustainable Development Goals (SDGs) addressing developing countries’ basic needs (nutrition, affordable housing), empowerment (decent jobs, education), and long-term environmental safety.
The Paris Agreement was also introduced this year at the UN Framework Convention. The objective was to limit global warming to well below 2 degrees Celsius — preferably 1.5 degrees — compared to pre-industrial levels.
When the COVID-19 pandemic began in 2020, public health and safety were brought to the forefront of everyone’s minds. Employees were either overworked or losing their jobs with terse notice, introducing an increased emphasis on ESG issues regarding worker’s rights. Corporations were being asked to acknowledge their responsibility for employee health, happiness, and job security.
Post-pandemic work conditions and labor shortages also increased risks of recessions by 2023. This added layer of economic uncertainty and looming layoffs furthered conversations about job security and worker’s rights.
While the Black Lives Matter movement began in 2013 as a response to Trayvon Martin’s murder, it reached new heights after May 25, 2020, when George Floyd was killed during a routine police stop. This event sparked protests across the United States against police brutality and systemic racism.
These protests made social inequalities increasingly visible, fueling a movement for more accountability regarding corporate social responsibility.
Following the first climate summit in 1992, a growing need for a common denominator in ESG reporting became more present, leading to the emergence of ESG frameworks. These frameworks enabled corporations to be more accountable and transparent with their stakeholders.
Today, ESG covers many aspects from employee equality to ethical decision-making policies for managers. The ESG practices that companies implement mirror the values that are shared by the companies’ customers and communities.
As reporting on material topics using ESG frameworks is becoming more widespread, the need for data curation and standardization is increasing as well. There is a growing understanding that in order for companies to succeed long-term, they must prioritize the environmental and social issues and do so by monitoring their ESG data.
*Disclaimer: This summary is for general education purposes only and may be subject to change. ESGgo, Inc., and its affiliates (the “Company”, “ESGgo”, “we”, or “us”) cannot guarantee the accuracy of the statements made or conclusions reached in this summary and we expressly disclaim all representations and warranties (whether express or implied by statute or otherwise) whatsoever.