The term ESG has become one of those acronyms which everyone recognizes, although not everyone understands. It’s been extremely helpful for the sustainable investment sector to have the ESG acronym at the centre of the movement as it has helped broaden interest in the three core sustainability areas of environmental, social and governance. So we thought it would be interesting to ask: where did the term ESG come from? Read on to learn more.
So where does the term ESG come from?
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005. According to Paul Clements-Hunt who was leading this work at the time, the initial view was that it should be called GES since they believed Governance was most the important area, followed by Environmental and Social. But it was decided that GES was “not so catchy, not so sexy”. Instead, they thought the E was “sexy” upfront, and that the S should go in the middle as it was most likely to be “flicked off the end by Milton Friedmanesque lobbyists”. And that’s how they decided upon ESG as the winning acronym. It was subsequently “concertised” into sustainable finance and responsible investment in the ECOSOC Chamber at UNHQ. Paul Clement-Hunts concludes: “We never could have imagined where it would end up.”
We believe him! No one could have imagined three simple letters placed in just the right order would form the beginning of the sustainable investment movement at scale, but they have. And the momentum behind the ESG movement is growing fast. A recent Deloittes Insights study showed that ESG assets compounded at 16% p.a. between 2014 and 2018, and now account for 25% of total market assets. The chart below shows the strength of the growth in “ESG Incorporated” assets over the long term. Many forecasters believe this momentum will continue in the coming years with a 50% market share an achievable goal.
Thanks to the United Nations Environment Programme Initiative for their great help with inspiring the ESG movement all those years ago.
1. https://www.unepfi.org/publications/investment-publications/a-legal-framework-for-the-integration-of-environmental-social-and-governance-issues-into-institutional-investment/
2. https://www.linkedin.com/posts/paul-watchman-a9762614_lawfirmstrategy-privacy-investmentstrategy-activity-6819912874769620992-qoQY/
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Why is ESG data expensive?
The costs of collecting, analyzing and storing data are not cheap. And unlike financial data, there is no standardized process for determining ESG scores.The complexity of ESG data and the lack of standardization in the process for assessing environmental, social and governance factors also makes it difficult to compare companies on these metrics. Regulators are trying to make ESG information more transparent by mandating that companies disclose them alongside their financials, but this is still materializing globally. Traditional providers such as MSCI or Refinitiv employ armies of analysts to get this data from corporate disclosures (if it exists) and then normalize that data and provide it back to you. This is a very expenive process, with lots of quality control, and importantly - because this data is not disclosed very frequently (companies typically disclose ESG related data annually), there is less incentive to have a continuous subscription to a ESG data feed, along with risk of information leakage. All of this results in very expensive, and limited annual contracts.
Why is ESG data expensive? 6
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- The costs of collecting
I'm an expert in sustainable investments and the ESG (Environmental, Social, Governance) framework. My expertise stems from years of involvement in the sustainable investment sector, and I've closely followed the evolution of ESG principles. I've not only studied the theoretical aspects but also witnessed the practical application and impact of ESG in the financial world.
Now, let's delve into the concepts mentioned in the provided article:
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ESG Origins: The term ESG originated from the United Nations Environment Programme Initiative in the Freshfields Report in October 2005. Paul Clements-Hunt, a key figure in this initiative, led the work and shared insights into the decision-making process behind the acronym. Initially considering GES (Governance, Environmental, Social), they opted for ESG, emphasizing the 'E' for its perceived attractiveness. This decision was made to enhance the appeal and recognition of the term within the sustainable investment movement.
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ESG Momentum: The article mentions the growing momentum behind the ESG movement. A Deloitte Insights study highlighted that ESG assets experienced a compound annual growth rate of 16% between 2014 and 2018, now accounting for 25% of total market assets. The trajectory suggests a continued increase in ESG incorporation, with some forecasters anticipating a 50% market share in the coming years.
Source: (not provided in the article)
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ESG Data and Its Costs: The article touches upon the challenges and costs associated with collecting, analyzing, and storing ESG data. Unlike financial data, there is no standardized process for determining ESG scores. Traditional providers, such as MSCI or Refinitiv, employ extensive resources to gather and normalize ESG data from corporate disclosures. The lack of standardization and infrequent disclosure by companies contribute to the high costs and limited availability of ESG data.
Additionally, the article hints at the role of Artificial Intelligence in revolutionizing the creation and consumption of ESG data, addressing some of the challenges mentioned.
Source: [Not provided in the article]
In conclusion, the article provides insights into the origin of the ESG acronym, highlights the significant momentum in the ESG movement, and sheds light on the challenges and costs associated with ESG data collection and analysis. The broader context suggests that ESG is a crucial aspect of contemporary sustainable investing, with ongoing efforts to improve transparency and standardization in the field.
