History & Evolution of ESG

The history of ESG investing is longer and richer than most people realise. Responsible investment did not arrive with the acronym "ESG" in the 2000s, its roots stretch back centuries, to religious communities who were refusing to profit from slavery and the arms trade long before the concept of a capital market existed in its modern form.

A Brief History of Sustainability

The ideas behind modern ESG investing grew out of the global sustainability movement in the late 20th century.

A major turning point was the UN's Brundtland Report in 1987. It introduced the most famous definition of sustainable development: development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

This led directly to the 1992 Rio Earth Summit, which established a core principle: businesses gain their legitimacy by meeting the needs of society, not simply through profit generation. Without these political foundations, the regulatory frameworks that support ESG today would not exist.

The Early Phase: Values-Based Investing

Responsible investing actually predates the modern environmental movement by centuries.

In the 17th and 18th centuries, religious communities like the Quakers and Methodists developed strict rules about what industries to avoid. Profiting from the slave trade, weapons, or alcohol was forbidden. This is known as negative screening, deliberately choosing not to invest in companies that conflict with your personal values.

The term socially responsible investment (SRI) grew entirely out of this ethical, values-driven tradition.

The Pioneer Fund and Early Ethical Funds

One of the first ethical mutual funds to formalise investment screens based on religious traditions was the Pioneer Fund, launched in 1928. It excluded tobacco and alcohol producers from its portfolio.

The modern institutionalisation of ethical exclusions arguably began at the height of the Vietnam War in 1971, with the establishment of the Pax World Fund (now IMPAX Asset Management). At the time, the fund offered an alternative investment option for those opposed to nuclear and military arms production.

The Anti-Apartheid Divestment Movement

In the late 1970s, the divestment movement became globally significant through campaigns against South Africa's apartheid system. The Sullivan Principles, developed by the Reverend Leon Sullivan, provided guidance for investors engaging with companies operating in South Africa. They required that any investment condition be that the investee company treated all employees equally regardless of race, and maintained an integrated working environment.

The resulting divestment campaign was implemented not only by investors but also by governments and corporations. It is widely credited with contributing to political and economic pressure that ultimately led to the dismantling of apartheid. This was a landmark demonstration that investment decisions could produce real-world societal change, and that the threat of divestment was itself a powerful tool for shareholder engagement.

The Modern Phase: From SRI to ESG

The transition from traditional SRI to what we now call ESG investing was driven by a series of pivotal developments in the early 2000s.

Corporate Governance Comes to the Fore

In the early 2000s, a string of high-profile corporate scandals, most notably the collapse of Enron and other large companies amid widespread accounting fraud, brought corporate governance into sharp focus. Investors and regulators recognised that poor governance practices posed serious financial risks that were not captured by traditional financial analysis.

In the United States, this led directly to the Sarbanes-Oxley Act of 2002, which introduced stringent requirements for corporate accounting, board oversight, and executive accountability. The Sarbanes-Oxley Act was a watershed moment: it demonstrated that governance failures were not just ethical problems but financially material ones.

Who Cares Wins: Coining "ESG"

In January 2004, UN Secretary-General Kofi Annan wrote to the CEOs of major financial institutions, under the authority of the UN Global Compact and with support from the International Finance Corporation (IFC), inviting them to integrate ESG factors into capital markets.

The initiative produced a landmark report titled "Who Cares Wins", published later that year. This report effectively coined the term "ESG" and made the case that embedding ESG factors into capital markets makes good business sense and leads to more sustainable markets and better outcomes for society.

At the same time, the UN Environment Programme Finance Initiative (UNEP FI) produced the Freshfields Report, which examined whether ESG integration was consistent with fiduciary duty.

The Principles for Responsible Investment (PRI)

In 2006, the Principles for Responsible Investment (PRI) were launched at the New York Stock Exchange. The PRI is an investor initiative operating under the umbrella of the United Nations and supported by UNEP FI and the UN Global Compact.

The six Principles collectively require signatories to incorporate ESG issues into their investment analysis, act as active and engaged owners, seek disclosure from the companies they invest in, and report publicly on their own progress. In short: put ESG at the centre of how you invest, and be transparent about how well you are doing it.

The following year, in 2007, the Sustainable Stock Exchange Initiative (SSEI) was launched, encouraging stock exchanges worldwide to promote transparency and disclosure on ESG issues.

The Stern Review

In 2006, economist Sir Nicholas Stern published the Stern Review on the Economics of Climate Change at the request of the UK Government. The review concluded that climate change is the greatest and widest-ranging market failure ever seen. Without action, the overall costs of climate change would be equivalent to losing at least 5% of global GDP each year, and potentially up to 20% of GDP or more when a wider range of risks was included.

The Stern Review was not the first economic report on climate change, but it had a profound influence on how investors worldwide understood climate risk as a financial issue rather than purely an environmental one.

2015: A Pivotal Year

Two landmark events in 2015 reshaped the global context for ESG investing.

The Paris Agreement, signed by 196 countries in December 2015, committed the world to limiting global warming to well below 2°C above pre-industrial levels, with efforts to limit the increase to 1.5°C. For investors, this was a signal that the global economy was committed to a low-carbon transition, making fossil fuel exposure, energy efficiency, and climate risk management financially material in ways that could no longer be ignored.

The same year, all 193 UN member states adopted the 17 Sustainable Development Goals (SDGs), a universal framework of goals covering poverty, clean energy, gender equality, climate action, and more, to be achieved by 2030. The SDGs gave investors a shared global framework for thinking about the social and environmental outcomes their capital could help to address, and have since become a common language for ESG reporting and impact measurement.

Crisis as Catalyst: 2008 and COVID-19

Two major global crises further accelerated the adoption of ESG investing.

The global financial crisis of 2008 was a stark reminder of the interconnectedness of societies, economies, and financial markets. It demonstrated clearly that market pressures alone do not always produce ideal outcomes for the wider economy and society, and that systemic risks with ESG dimensions (governance failures in the banking sector, for instance) could destabilise the entire financial system.

The COVID-19 pandemic of 2020 and 2021 reinforced this lesson. The pandemic exposed the fragility of global supply chains, the importance of social resilience, and the deep linkages between health, social inequality, and economic stability. It also reignited institutional investors' interest in the extra-financial performance of companies, and strengthened the perception of large asset owners as "universal owners": entities so large and diversified that they are, in effect, exposed to the performance of the economy as a whole.

A Timeline of Key Milestones