Environmental Social Governance Investing


We recognise that human beings are motivated primarily from a position of survival and self-preservation. Beyond this initial construct lie the frameworks of social cohesion. Economic participants are rational in the main and recognise that society cannot function if a model of self-interest takes over. The notion of a social contract is not a new idea. Thomas Hobbes & John Locke were the principal exponents of social contract theory during the enlightenment period of the late 17th century. The Oxford dictionary defines a social contract as

“an implicit agreement among the members of a society to cooperate for social benefits”.

Agreement and cooperation are the antithesis of self-interest and self-preservation. How then do we incentivise participants to engage constructively in the social fabric of community, society and collective identity? It is no easy task. There is growing evidence that global citizens are becoming more marginalised from central government. The reasons are right in front of us and provide fuel in my opinion for the growing enthusiasm for sustainable, ethical or ESG investing. These issues include escalating global wealth inequality, the continued erosion of human rights, growing apathy towards the political class, lost confidence in the financial infrastructure and the destruction of our planet. ESG is often labelled by reference to climate change risks. These include excessive carbon emissions, water quality, energy efficiency and waste recycling. These account for the environmental aspects of ESG investing or the “E”. However they fail to recognise many of the simmering social and global governance issues that are also fuelling the disquiet. The Covid-19 pandemic has shunned a light on many important social issues. This includes the definition of work or perhaps more importantly the efficiency of work. I have lost count regarding the number of casual conversations I personally have had on the subject of work-life balance. Employee relations could be entering a very volatile period on the back of these road to Damascus moments. The “Me Too” and “Black Lives Matter” movements represent powerful examples of the focussed and organised concentration on gender equality, diversity and race issues. Organisation is key and this concentrates minds like nothing else. The proliferation of news transmission via mobile, tablet or laptop means citizens are connected. They are connected to social issues ranging from international [and domestic] human rights violations, child and labour issues and global security concerns.

The further erosion of trust in the system stems from the moral bankruptcy of financial institutions post 2008. I don’t subscribe to the narrative that people just forget. A trip down memory lane is instructive for one moment. It is safe to say that complex structured derivative products had a significant role to play in the collapse of the financial system in 2008. The insurance giant AIG was the main culprit here. The company lost an estimated $30bn on their ill-fated credit-default swaps and another cool $21bn on securities lending. Not a good year in the office one might think for the AIG CEO or the “Man Who Crashed the World” as he became known.  Well Mr. Joseph Cassano may beg to differ having walked away with bonuses estimated at $34m. Citigroup lost nearly $20bn “with a “B” in 2008. Its CEO, Mr. Vikram Pandit was paid $10.8m in the same year. Lehman Brothers was exceptional in that it was allowed to fail in 2008. The combative figure Mr. Richard Fuld held the top job at that time. He earned $34.38m in 2007. At the risk of removing the reader’s stomach I will leave it there. Unfortunately I could go on. I think Lincoln said it best over 120 years ago when he noted that

“You can fool all of the people some of time; you can fool some of the people all of the time, but you can’t fool all the people all the time.”

The governance issues requiring focus are broad and wide-ranging. They include notable instances of bribery and corruption, obscene executive compensation, poor corporate practise and an industry lacking transparency. At the heart of ESG investing are the central mechanisms of Board independence, transparent voting procedures and Shareholder rights.

Early Origins

In the 18th century religious establishments were the first to incorporate the notion of exclusionary principles into their investment selection process. Many Methodists churches in the United States began to exclude investments in alcohol, tobacco and armaments. We can also point to the moral based investment principles embedded in Sharia law and the Quaker movement’s refusal to make any investments related to the slave trade in the US. This faith-based approach became the origin of modern day ethical investing. A major shift in social unrest emerged in the 1960s and 70s as mobilised protestors rejected the Vietnam War. Broad groups with diverging social concerns emerged to create a powerful movement of anti-government protest. The most rapid growth in socially responsible investing has taken place since the turn of the millennium. Heightened concerns around global warming and depletion of natural resources has forced governments to take rapid action. Whilst an exclusionary based investment principle remained, companies were targeted that could provide evidence of practical positive ESG performance. Through processes of positive screening and engagement companies are motivated to adopt best policies and practises. There were concerns expressed by the investment management industry that “negative screening” through exclusionary principles reduced the opportunity of portfolio diversification. Positive engagement created a shift whereby shareholder influence could create the change required and offer wider investment opportunities.

A summary of some of the more pivotal moments is included below:

1928 A Boston based ecclesiastical group were the first to formulise a negative screening process in their Pioneer fund

1950s & 1960s Electrical and Mine Workers Unions started investing pension capital in affordable housing and health facilities

1960s In the US, the 1960’s was an historic period of social upheaval and protest. Mass movement against the Vietnam War led to student protests across the country. The Black Power and the American Indian movements emerged. Women’s rights lobby groups and farm worker associations joined the Green Power movements in demanding change.

1970s While mass social protests continued Prof. Milton Friedman introduced his influential “Shareholder Value Theory”. This highlighted the need for businesses to look beyond profit maximization and shift more towards sustainability.

1980s The “Comprehensive Anti-Apartheid Act” outlawed any additional investment in South Africa. The eighties was the decade of environmental disasters including the Prudhoe Bay oil spill and Chernobyl. The Coalition of Environmentally Responsible Companies or CERES was formed in 1989

1990s The first Social Investment Index was created to track sustainable investment through a capitalization-weighted methodology. Rio de Janeiro hosted the Earth summit in 1992. 154 countries signed a commitment to reduce environmental damage globally. The Kyoto Protocol [1997] extended the 1992 United Nations Framework Convention on Climate Change. It formally committed state parties to reduce greenhouse gas emissions, based on the scientific consensus that global warming was a human-made phenomenon.

2000s The United National Global Compact is launched

In 2004 “Who Cares Wins– Connecting Financial Markets to a Changing World” was published. This provided guidelines for companies to incorporate ESG into their operations.

2011 The Sustainability Accounting Standards Board (SASB) is launched. This is an accounting and measurement framework that standardised sustainability across 77 countries.

2015 Paris Agreement is signed. This is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.

2020 The COVID-19 pandemic has accelerated the need for robust CSR and ESG investment.

2021 Blackrock CEO Larry Fink made public his belief and commitment to ESG in his annual letter to shareholders.


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