The global financial crisis underscored the importance of transparency, accountability, and a focus on long-term investment horizons over "short-termism". The crisis also demonstrated 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, the term “ESG” – for environmental, social and corporate governance issues – is now entering the lexicon of mainstream finance. 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 initial efforts, such as “Who Cares Wins” and the United Nations Environment Programme’s (UNEP) Finance Initiative, a new paradigm has emerged: investors and analysts are 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.
At the same, financial markets have witnessed the development and growth of the UN-supported 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 1200 institutional investors representing more than $40 trillion in assets.
Taken together, these efforts – in combination with other important global projects such as the 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.
Additionally, in 2009 the Global Compact Office, the United Nations Conference on Trade and Development, the Principles for Responsible Investment and the United Nations Environment Programme Finance Initiative together launched Sustainable Stock Exchanges (SSE). SSE explores how stock exchanges can work together with investors, regulators and companies to enhance corporate transparency – and ultimately performance – on environmental, social and corporate governance (ESG) issues, and encourage responsible long-term approaches to investment. Learn more about Sustainable Stock Exchanges.
Who Cares Wins Initiative
Documents & Standards
Deputy Director and Head of Financial Markets
powerg (at) un.org
Manager of Investor Engagements with the UN Global Compact
danielle.chesebrough (at) unpri.org
(Last updated: 6 May 2014)