HomePreqin AcademyLesson 5: ESGHistory of ESG

History of ESG

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In this section you'll learn about the evolution of ESG. We cover global landmark legislation and the most important sustainability milestones in the alternatives sector.

Historical Timeline of ESG

1700s: ESG by Another Name

ESG considerations in investment and operations existed centuries before we called it ESG. The key drivers for ancient “exclusion list” or “code of conduct” prototypes were religion, moral norms, and cultural values. Some examples of value-based investment can be seen in the 1700s with the Quakers and Methodists in the United States and Europe who would exclude slave labor from their investment practices.

1980s: The Rise of Social Responsibility Investment

As early as the 1960s, there was a growing movement for divestment from Apartheid South Africa before it came to the fore in the mid-1980s. Apartheid was an imposed system of rule based on racial segregation that lasted from 1948 to 30 June 1991 in South Africa. The divestment campaign and broader mounting political pressure from global players has been widely credited as one of the galvanizing forces leading to the end of Apartheid.

1990s: Global Landmark Sustainability Legislation

The “Triple Bottom Line,” or the notion of People, Planet, Profit (PPP), was the first time businesses had to focus on two other P’s, beyond profits. The concept was the starting point of what later became ESG or SRI, growing in prominence following the ratification of legislation from the United Nations. In 1992, The United Nations Framework Convention on Climate Change (UNFCCC) is established, signed by 154 states at Rio de Janeiro, coming into effect in March 1994. The overall goal of the UNFCCC is the “stabilization of greenhouse gas concentrations in the atmosphere, at a level that would prevent dangerous anthropogenic human-induced interference with the climate system.”

2000s: The United Nations Global Compact is Launched

The United Nations Global Compact (UNGC) is launched in July 2000 as both a principles-based policy platform and a practical framework for companies committed to sustainability and responsible business practices. There are Ten Principles covering human rights, labor, the environment, and anti-corruption.

2006 – The United Nations’ Principles for Responsible Investment (UNPRI) reporting framework is launched in April 2006, following an invitation from the then-United Nations Secretary-General Kofi Annan to the world’s largest institutional investors to come together to develop the Principles for Responsible Investment. The number of signatories has grown approximately 40-fold since its inception from 100 to over 4,000. Each signatory must adhere to the Six Principles for Responsible Investment. Examples include “the incorporation of ESG issues into investment analysis and decision-making processes” (Principle 1), being “active owners and incorporate ESG issues” into ownership policies and practices (Principle 2) and the establishment of “appropriate disclosure on ESG issues by the entities” in which signatories invest (Principle 3).

2008 – In the wake of the Global Financial Crisis (GFC), investors searching for yield created notable growth in interest around natural resources, which were originally seen as an offshoot of the private equity and infrastructure asset classes.

2010s: ESG Enters Mainstream Finance Practices

Since the launch of PRI in 2006, the number of ESG laws and standards has increased, pushing ESG to the top of the financial services industry’s agenda.

2015 – The Sustainable Development Goals (SDGs) are established by the United Nations General Assembly. The intention is to achieve them all by the year 2030. There are 17 goals, with a holistic approach to addressing these five pillars: Basic Needs (Nutrition, Affordable Housing); Empowerment (Decent job, Education); Climate Change (Alternative Energy, Green Buildings); Natural Capital (Sustainable Water, Sustainable Agriculture); Governance (Bribery & Ethics, Governance Structure). The Task Force on Climate-Related Financial Disclosures (TCFD) is launched in December 2015, formed by the Financial Stability Board (FSB), with a view to develop a set of voluntary climate-related financial risk disclosures which can be adopted by companies.

2018 – The Intergovernmental Panel on Climate Change (IPCC), a United Nations body for assessing the science related to climate change, releases its Special Report on Climate Change on the impacts of global warming of 1.5°C above pre-industrial levels.

2021 – The Sustainable Finance Disclosure Regulation (SFDR) covering market participants within the European Union is launched in March 2021. The legislation looks to promote strong ESG values and mandates fund managers to actively disclose whether their fund falls under Article 6 (no ESG incorporation), Article 8 (ESG Fund), or Article 9 (Impact Fund).

Where Is the Industry Today and Where Are We Headed?

In the chart above, you can see how ESG commitments have steadily increased over time, becoming a key part of the alternative investments landscape. With the global pandemic, aggregate capital raised for both non-ESG and ESG funds decreased in both 2020 and 2021. However, as ESG becomes more important for investors and fund managers, the general upward trend for ESG - in relation to overall fundraising commitments made - is likely to continue.

Private equity historically has had the highest amount of AUM under ESG commitment by quite a large margin. In recent times, the other alternative asset classes have implemented ESG policies. Infrastructure, private debt and real estate are now the asset classes with the highest amount of AUM under ESG commitment.

Institutional investors have been at the forefront of ESG investing initiatives and continue to drive growth in the sector. More than a third of investors surveyed by Preqin have stated that ESG will become a bigger part of the industry in the next three years. With 80% of investors intending to have an ESG plan in place by 2023, this growth shows no signs of slowing down.

In this lesson, we took a journey through time to discover how ESG evolved from a niche form of investment to global finance mainstream. Until recently, the largely unregulated alternatives market has avoided widespread scrutiny from investors. Now however, investors are requesting more transparency from the funds they invest in, and industry regulation has moved into the spotlight.

Go back: What Is ESG?

Next up: Understanding ESG