The origins of modern ESG investing can be directly traced to the 1970s. Its roots were established much earlier when faith-based organizations began to shun commodities and industries that conflicted with their value systems. In the 18th century the Methodists, a Protestant denomination, eschewed investments in the production of tobacco and liquor and the slave trade. The Quakers soon followed by prohibiting investing in any war related activities as well. The Pioneer Fund was created in 1928, the first socially responsible investing (SRI) fund offered to the US public.
During the Vietnam War era, many US investors followed the SRI paradigm by adjusting their portfolios to eliminate “war profiteering.” Created in 1971, the Pax World Balanced Fund restricted investments based upon an industry’s negative social impact. It did not invest in any company that produced, or was a part of the supply chain for Agent Orange, a dangerous herbicide used during the war.
Growing public engagement in civil-rights, antiapartheid, environmental and many other policy issues expanded into investment strategies. Despite Milton Freidman’s declaration that, “the social responsibility of business is to increase profits,” other SRI based funds were quickly established. The First Spectrum Fund (1971) assured that they would base their investment decisions upon a company’s performance in “the environment, civil rights, and the protection of consumers.” The Dreyfus Third Century Fund (1972) investment focus was on companies that contributed, “to the enhancement of quality of life in America.”
In 1972 journalist Milton Moskowitz published a list of “socially responsible stocks” that included SRI based mutual funds. Moskowitz’s criteria has been subsequently incorporated and adapted to serve as the basis for a host of other SRI based funds. Many of the earlier funds were based upon an “avoidance” screening strategy that sought returns similar to the general market without investments in alcohol, tobacco, weapons, gambling, pornography, and nuclear energy. Other funds with a broader ESG focus employed a “best in class” approach that invested in companies that did not have any deleterious workplace, governance, environment, social justice or other similar practices.
There are now over 800 registered investment companies with ESG assets. Many of these firms have embraced a combination of values-based investing with shareholder engagement that leverages an ownership position with a company to promote changes in their ESG policies and performance. While this type of stakeholder activism has always been a part of socially responsible investing, the growing public concerns over ESG issues has increased its reach and impact. Shareholder resolutions and the access to management that such ownership positions provide remain powerful agents for positive changes in corporate ESG strategies.