ESG and SDGs. Two Complementary Frameworks

The origin of the ESG or Environmental, Social and Governance framework can be traced back to the 70s. Sustainable Development Goals (SDGs), established by the United Nations General Assembly in 2015, set forth 17 critical areas to address economic, social, and environmental challenges by 2030.

Both frameworks operate under the same principle; the need to establish a sustainable and just global economy.

ESG provides a corporate perspective that encourages companies to highlight their efforts to be socially and environmentally responsible under effective governance. The compatibility with the 17 SDGs, on the left, can be seen in the diagram below.

The ESG framework encourages companies to adopt internal and external policies that change their operations and improve communication with stakeholders including investors, customers and governmental agencies.  The business sector accounts for 72 % of the GDP of the 38 member counties of the Organization for Economic Co-Operation and Development (OECD). With ESG goals, strategies and policies that are effective and timely, businesses can assure that we can all eventually live on a healthy planet within a safe and equitable society.

The alternative is undoubtedly the end of civilization as we know it, especially when considering the impact of SDG #6 (Affordable and Clean Energy) and #13 (Climate Action). Plastic waste in the environment is an example of a very significant issue not included in the United Nations’ SDGs which should also be part of any corporate ESG initiatives.

Competition among companies is the key to a well-functioning, non-monopolistic capitalist  economy. Awareness about ESG and SDG is significantly increasing everywhere and at all levels. Companies are now providing information about their ESG strategies and policies as a way to distinguish themselves from other companies in their industries.  Ultimately it will be up to external stakeholders to insure their implementation and their compatibility with SDG and other similar frameworks such as CSR (Corporate Social Responsibility) and the 3 Ps (“people, planet and profit”).

The path towards a sustainable and just economy exists. Currently needed is the means to encourage corporations to proceed forward.

Advance ESG is the only non-profit organization that empowers public stakeholders to effectively influence companies to improve their ESG policies and strategies.  Call it “ESG checks and balances,” the “wisdom of the crowd,” or even “grassroots for sustainability.” It is an approach to ESG advocacy whose time has come.

What is stakeholder capitalism?

Capitalism is defined by the International Monetary Fund as, “an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.”[1]

The types of capitalism differ in whom is most important entity (stakeholder) that can affect or be affected by a business.

In State Capitalism the government is the key stakeholder acting as a steering force in the marketplace and can intervene when it deems necessary. As such, business interests are subservient to the interests of the state.

In Shareholder Capitalism the owners of the business are the primary stakeholders whose principal goal is to increase business profits. Short-term profit maximization is the key driving force and all other considerations are of lesser importance.

Stakeholder Capitalism envisions that all stakeholders, the owners, customers, employees, suppliers, essentially anyone who is impacted by business decisions, matter equally. The key characteristic is the emphasis on improving society and increasing the well-being of everyone rather than to generate a financial return. This form of capitalism focuses on long-term value creation and ESG parameters. In this system, individuals,  private businesses and public corporations can still innovate and compete freely while also being protected and guided to ensure that the general direction of economic development is for the greater good.

“Stakeholder capitalism is a vow to do business in service of all stakeholders, rather than just profits and returns. Shareholders are of course important, but it’s vital that companies also consider workers, communities, the environment, and more when defining success – especially because doing so has demonstrated benefits not just to society, but also the bottom line. This approach is neither status quo nor abandoning capitalism altogether. It’s simply recalibrating the system to take a deeper view of business, and ensure an economy that works for all.” – Paul Tudor Jones, founder of Tudor Investment Corporation and The Robin Hood Foundation, Co-Founder and Chairman of JUST Capital

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[1] https://www.imf.org/external/pubs/ft/fandd/2015/06/basics.htm

What does “ESG” Mean?

The Environmental, Social and Business Governance (ESG) aspects of a company’s activities are the three main evaluation standards utilized to measure a company’s societal and sustainability policies and practices. ESG criteria are applied most frequently by investment firms and individuals who want to direct their money toward companies that are socially responsible. ESG standards are also used to create the “best” and “most progressive” companies lists published by various rating services that impact consumers purchasing patterns.

Each aspect of ESG embraces a broad range of factors and benchmarks. Environmental considerations include sustainability, renewables, pollution mitigation, waste management, climate change, conservation of natural resources, biodiversity, energy efficiency, regulation compliance and recycling.

Social aspects of business policies comprise the company’s working conditions (including child labor and slavery), employee health and safety, human rights, interaction with local communities (including indigenous communities), diversity in supply chains, human capital development, doing business with despots, engagement with third-party activists, product safety and employee benefits.

Business governance implications include equal opportunity, diversity, structure and independence of directors, executive renumeration, donations and political lobbying, tax strategy, shareholder rights, anti-corruption, risk management, stakeholder engagement, conflicts of interest, accident and safety management, supply chain management, and transparent ESG reporting.

ESG considerations provide a framework for responsible investing that incorporate a values-driven approach that balances financial returns with social outcomes. ESG focused investments include environmental, social and governance risks and opportunities into traditional financial analysis based on a systematic approach and appropriate research sources.

How did ESG start?

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.