Recent events in global financial markets underscore the importance of transparency, accountability, and a focus on long-term investment horizons over "short-termism". The crisis also demonstrates that due to economic integration, a crisis in one part of the world can quickly spread to other regions. In the same way, many social and environmental challenges do not respect national borders, placing a premium on an expanded view of risk management to include extra-financial issues.
As rising numbers of companies from around the world are embracing corporate sustainability as a management imperative, the mainstream capital markets – including major institutional investors – have begun ground-breaking efforts to retool their investment strategies and models to adjust to new global realities.
Indeed, a new term has entered the lexicon of finance: “ESG”, for environmental, social and governance issues. This term and the underlying concept were first proposed by the UN Global Compact’s “Who Cares Wins” initiative in June 2004 as a way of focusing mainstream investors and analysts on the materiality of and the interplay between these issues – be they related to climate change, water, human rights or anti-corruption, to name just a few.
Until the time of “Who Cares Wins” and some related initiatives, much of the activity in the investment community had focused on socially responsible (or ethical) investing in which investors and fund managers employ a negative-screen methodology – removing from investment consideration companies and industries deemed objectionable for ethical or moral reasons.
However, through such efforts as “Who Cares Wins” and the United Nations Environment Programme’s (UNEP) Finance Initiative, a new paradigm has emerged – investors and analysts evaluating companies and other assets on their ESG performance as a qualitative and quantitative piece of fundamental analysis. The underlying premise is this: companies that proactively manage ESG issues are better placed vis-à-vis their competitors to generate long-term tangible and intangible results – and therefore are better investment bets. In addition, such an approach better aligns investors' interests with broader societal goals.
Through “Who Cares Wins”, the UN Global Compact – in partnership with the International Finance Corporation (IFC) and the Government of Switzerland – has been working with a range of large asset-management companies to improve analysis and investment models on these issues. One workstream, for example, focused on ways to improve communication between companies and investors on these issues.
At the same, financial markets have witnessed the development and growth of the Principles for Responsible Investment, an initiative developed by the UN Global Compact and the UNEP Finance Initiative. Launched in April 2006 at the New York Stock Exchange, the PRI invites large institutional investors – both asset owners (e.g. pension funds, endowments) and asset managers – to commit to a set of six principles designed to put ESG issues into the core of investment decision-making. The initiative has surpassed all expectations – and today stands as the world's largest responsible investment initiative with more than 1000 institutional investors representing more than $30 trillion in assets.
Taken together, these efforts – in combination with other important global projects such as the IFC’s Equator Principles and the Carbon Disclosure Project – are helping to sensitize capital markets to the importance of ESG issues, and should be a major force in driving the corporate sustainability movement to even higher levels.
Gavin Power
Deputy Director and Head of Financial Markets
powerg (at) un.org
+1-212-963-4681
Danielle Chesebrough
Manager of Investor Engagements with the UN Global Compact
danielle.chesebrough (at) unpri.org
(Last updated: 15 February 2013)
