How Covid Changed the Nature of ESG: A Coming-of-Age Story

5 min read

Credit: Eva Bee Illustrations

In a year that highlighted economic disparities, unequal healthcare access, and the continued impacts of systemic racism, 2020 would be a catalyst for the ESG movement

Almost 20 years ago, the United Nations Environmental Programme Initiative established the term ESG in the 2004 UN Global Compact’s report entitled Who Cares Wins. The report conveyed the idea that immersing environmental, social and governance factors in capital markets makes good business sense, results in more sustainable markets and ultimately, better outcomes for societies. Despite this being the first time the term had ever been used, it did not mark the birth of ESG. As with the overarching concept of corporate social responsibility, ESG has an overlapping history that goes back much farther than 2004.

It was in fact the religious groups of the 18th and 19th century that were the first to pursue ethical investing. By embracing a faith-based approach, many Methodists and Quakers began to avoid investments associated with alcohol, tobacco, slavery, and gambling. It wasn’t until ESG entered a decade reflecting a social and political environment not so different from that of 2020, that it would similarly see itself take off.

The 1960s and 70s marked a historic shift in social unrest in America. Torn by diverging social concerns, the country saw the birth of several powerful mass movements; mobilised students were protesting the Vietnam War, Martin Luther King Jr. was leading the Civil Rights Movement, Native American activists began protesting on Alcatraz Island, and the Women’s Liberation Movement saw women challenging the power structure and demanding changes across the American political and legal system. Collectively, these movements would see SRI (Socially Responsible Investing) expand as an investing discipline across the U.S. Moreover, ESG is not a new concept, but one born out of powerful actions across several decades that have culminated to forge our understanding of the movement it is today. 

LEFT: A group of women, under a ‘Women’s Liberation’ banner, march in support of the Black Panther Party, New Haven, Connecticut, November 1969. Credit: David Fenton. RIGHT: Harold Patty, Oohosis, Peggy Lee Ellenwood and Sandy Berger giving the Red Power salute moments after being removed from Alcatraz Island, June 1971. Credit: Ilka Hartmann.

2015 marked an integral year in ESG’s journey. The first-ever universal, legally binding global climate change agreement was brought to life at COP21: The Paris Agreement. Yet, it was the creation of the Sustainable Development Goals by the United Nations that would prove particularly impactful; the 17 goals would be fundamental in acting as a framework informing ESG reporting strategies. 

With sustainability no longer a corporate novelty, ESG-mandated assets would be on track to represent half of all professionally managed assets globally by 2024. As a result, the role of CSO (Chief Sustainability Officer) would similarly see itself grow to become a crucial member of the management team. According to the Weinreb Group, the number of CSOs across Fortune 500 companies in 2020 soared to 95, reflecting a growth of more than 228% since 2011. As ESG gained worldwide traction, the role of CSO would evolve too. No longer would climate expertise be the chief prerequisite for the job, but additionally the ability to operate at the C-suite level and communicate the links between sustainability and key business dynamics. 

At their current growth rate, ESG-mandated assets (defined here as professionally managed assets in which ESG issues are considered in selecting investments or shareholder resolutions are filed on ESG issues at publicly traded companies) are on track to represent half of all professionally managed assets globally by 2024. Deloitte Insights

ESG has evolved from a corporate social responsibility initiative into a global movement symbolising three standards: Transparency, Accountability, and Responsibility. Yet, these three letters weren’t always in this order. In fact, the acronym began as ‘SEG’ but this was dismissed as it was felt that social investing was still a vague concept. ‘GES’ would also be trialled, under the belief that Governance took precedent over Environmental and Social. Yet it was determined that this was neither attractive nor catchy and so the United Nations Environment Programme Financial Initiative team would finally settle on ESG.

It’s easy to view ESG as the acronym it is. With each letter symbolising deeply complex elements of sustainability, navigating the landscape can be quite daunting. Not only does E start off as the frontrunner but it pertains to matters such as climate change, resource depletion, waste, deforestation, and pollution. Understandably, history would show that environmental metrics have primarily been pushed to the forefront of ESG. Governance reflects the rules, relationships, and conditions supporting economic activity, referencing shareholder rights, corruption, executive pay, and board composition. So, despite being the last letter, history would also find governance practices being prioritised. 

Akin to the fabled middle child, it is the social element within ESG that would find itself overshadowed, ignored, and largely neglected. The centrality of Social lies in how a company reconciles its relationships with its employees, the societies in which it operates, and the political environment. Yet, goals addressing social elements of ESG have often found themselves measured by superficial metrics such as diversity head counts, which deeply lack insight into the nuanced issues of employee’s experience of inclusion and growth opportunities. Ultimately though it may have been easier to address each element as its own independent issue, the consequences of this would never be felt more than ever than in the events that would transpire in 2020.

A once-in-a-century global pandemic, political upheaval, and racial reckoning; the culmination of these events would completely alter how companies view ESG. With mass layoffs, furloughs, and salary cuts, decades of progress towards gender equality in the workplace were grievously erased. Whilst many companies were reverting executive compensation to full pay and using loopholes to ensure executives received bonuses, it was encouraging to see many companies take accountability and prioritise their employees. Airbnb’s CEO Brian Chesky would be widely praised for showing clarity and empathy in an open, sincere letter to employees about necessary layoffs. Moreover, Comcast’s top executives would donate 100% of their salaries to charities supporting COVID-19 relief efforts as well as committing $500 million to support employees with continued pay and benefits. 

The pandemic also highlighted health disparities within communities of colour; Black, Latino, and Native American people in the U.S. experienced two to four times as many cases, hospitalizations, and death compared to white Americans. The tragic deaths of George Floyd and Breonna Taylor were the tipping point; a racial reckoning was felt across organisations around the world.

Margaret Burnham, Director of the Civil Rights and Restorative Justice Project and distinguished Professor of Law at Northeastern University School of Law

This is taking place in a world that is not only deeply fractured, but also deeply fragile because of the coronavirus, the economic crisis that makes the country look a little bit like 1929, and the existential threat of climate change, it’s everything collapsing all around us.

As the Black Lives Matter Movement gained worldwide traction across social media, public awareness of racial injustice was heightened. Stakeholders at grassroots levels were becoming more vocal about their concerns through shareholder resolutions, online petitions, and employee initiatives. They wanted to see a commitment to raise the level of Black representation in management and engagement with Black-owned suppliers. Fundamentally, apathy was no longer an option. In order to recover from the crisis of 2020, organisations would have to recognise their fundamental role in helping create equitable representation through positive advocacy for systemic change and an increased investment in social infrastructure.

For many companies, it was the first time that they were deeply reflecting internally on their own workforce policies, and actions around diversity, inclusion, and advancing social justice. Almost 2,000 companies across the U.S. signed on to “Time to Vote,” a non-partisan effort that allows companies to increase voter participation by giving employees paid time off to vote and perform their civic duty. Additionally, in its biggest renewable energy deal, Microsoft would pledge to buy 500 Megawatts of solar energy from and for under-resourced communities, working with local leaders and prioritising minority and women-owned businesses.

Over the last hundred years, ESG has become an ever-changing and ever-evolving movement. If 2020 has shown us anything it is that ESG progress is not linear; the struggle, though different in some ways, was and continues to be just as great as it was a hundred years ago. Moving forward, ESG continues to show encouraging signs of growth; approximately three-quarters (71%) of individual investors, globally, wanting to make a positive social impact as part of their investment objectives, with the response rate for millennials even higher (74%). With an amplified and accelerated focus on social impact, perhaps a new era of sustainable investing has begun?

Erika Da Costa Hi, I'm Erika! My passion for writing has led me to cover topics relating to environmentalism and social sustainability, e.g. the impact of IoT and AI in Protecting Biodiversity, Sustainable Tourism and Healthcare.

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