ESG – What’s Old Is New Again - Traders Magazine (2024)
Fifty years ago this January, Adolf Berle delivered one of his last lectures at Columbia Business School, on the importance of social responsibility in corporate governance (Berle died in 1971).
Berle is in many ways the father of the concept of environmental, social and governance (ESG) standards for corporations. In 1932, as a young professor at Columbia Law School, Berle was the co-author of “The Modern Corporation and Private Property,” a seminal text on corporate governance. Berle’s insight was that the means of economic production was concentrated in only a handful of large public companies – 200 at most – and that these companies had power and reach that rivaled national sovereigns.
While some saw this as justification for greater antitrust enforcement, Berle believed that breaking up these companies would lead to massive economic inefficiencies. He instead argued for regulations to enforce “business statesmanship” – essentially the notion that corporations and their leaders had already begun to take on certain social responsibilities alongside their profit motives, and that corporate law should be updated to reflect that reality.
Some questioned (and still question today) whether anyone other than shareholders can impose an ongoing “social” obligation on a for-profit corporation. The basis for Berle’s conclusion was eminently logical, however: he observed that the size and scale of these corporations required owners (shareholders) to delegate managerial functions to a class of professional managers who would run the company, reducing shareholders to the role of passive investors. On paper, the new managerial class nominally worked for the owners and were supposed to be guided by maximizing their profit, but the facts on the ground pointed in the opposite direction: managers, and not owners, controlled the allocation of the firms’ resources, and shareholders rarely objected (successfully) when managers directed those resources toward the managers’ priorities – including higher pay and equity for the managers themselves – rather than the owners’ interests. Berle speculated that having thus conceded that non-owners (i.e., managers) could set the corporation’s priorities, shareholders would not be in a strong position to object if other non-owners (i.e., the community) demanded that corporations direct resources to community priorities alongside the priorities established by managers. As Berle put it,
“[Managers] have placed the community in a position to demand that the modern corporation serve not alone the owners or [management] but all society…Should the corporate leaders, for example, set forth a program comprising fair wages, security to employees, reasonable service to their public, and stabilization of business, all of which would divert a portion of the profits from the owner of passive property, and should the community generally accept such a scheme as a logical and human solution of industrial difficulties, the interests of passive property owners would have to give way.”
What is so interesting about Berle’s conclusion is its relevance today. To wit, 88 years after Berle’s treatise and 50 years after Berle lectured a new generation of business students on ESG, Larry Fink, the chairman of Blackrock, essentially said the same in his recent open letter to CEOs and investors:
“The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society.As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.”
Fink is not alone in his insistence on corporations as agents of social good: In September 2018, State Street Global Advisors announced that it would vote against director slates that don’t have a female director. Last summer, 181 corporations signed on to the Business Roundtable’s “Statement on the Purpose of a Corporation”, which included a commitment to embrace sustainable practices, foster diversity and inclusion, support the communities in which they work, and improve transparency and engagement with stakeholders. At the most recent Davos meeting in January, David Solomon announced that Goldman Sachs will no longer take a company public if it does not have a director who is either female or diverse.
Clearly, the more things change, the more they stay the same. What is also clear is that Berle’s vision is essentially the new reality – as Fink wrote in his letter, “while government must lead the way in this transition, companies and investors also have a meaningful role to play.”
ESG standards are the way to measure and evaluate how companies are doing in executing that meaningful role. The markets would do well to pay attention.
Exactly 90 years ago, the young Professor Adolf Berle, from the Business School of Columbia University, who today is considered the father of the ESG concept, saw major state-owned corporations as the most powerful entities capable of initiating social change.
A 2004 report from the United Nations – titled Who Cares Wins – carried what is widely considered the first mainstream mention of ESG in the modern context. This report leaned in heavily, encouraging all business stakeholders to embrace ESG long-term.
The term ESG first came to prominence in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations (UN).
The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.
ESG means using Environmental, Social and Governance factors to assess the sustainability of companies and countries. These three factors are seen as best embodying the three major challenges facing corporations and wider society, now encompassing climate change, human rights and adherence to laws.
In all, BlackRock's ESG-related assets under management swelled 53% from the beginning of 2022 through the end of last year, according to data provided by Morningstar Direct. Over the same period, the wider ESG fund market grew only about 8%.
IS IT JUST MILLENNIALS DOING IT? No, the vast majority of money in ESG investments comes from huge investors like pension funds, insurance companies, endowments at universities and foundations and other big institutional investors.
There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.
The Bottom Line. ESG investing focuses on companies that follow positive environmental, social, and governance principles. Investors are increasingly eager to align their portfolios with ESG-related companies and fund providers, making it an area of growth with positive effects on society and the environment.
Biden administration moves to nix US states' challenge to ESG investing rule. June 5 (Reuters) - The Biden administration has asked a federal judge to toss out a lawsuit by Republican-led states seeking to strike down a rule allowing socially-conscious investing by employee retirement plans.
Some opponents also believe that ESG investing is politically motivated and could lead to biased investment decisions.” In a line used by proponents, those in opposition to the ESG movement also believe there is substantial support behind them.
SBI Magnum Equity ESG Fund, the oldest scheme in the category, offered 15.71% in a five year horizon. Around seven schemes have a performance record of three years.
It must be noted that none of the currently enacted “anti-ESG” regulations prohibit or seek to discourage ESG-related investment where such investment is made strictly as a result of financial considerations and analysis of the investment.
It helps regulators to get information and process it as well. 3. Investors are increasingly choosing to invest in companies that align with their values and goals. 4.
PwC Named a Global Leader in ESG and Sustainability Consulting by Independent Analyst Firm. Verdantix, the international research and advisory firm, named PwC a 'Global Leader in ESG and Sustainability' 2024 in its report, Green Quadrant: ESG And Sustainability Consulting 2024.
The Head of Sustainability and ESG is a senior leadership position responsible for developing and implementing sustainability strategies while considering the environmental, social, and governance impacts of an organisation's operations.
The top 100 environmental, social and governance funds had an aggregate of $440bn in assets under management in 2022, with Blackrock as the largest ESG fund manager, according to management consultancy Opimas.
Edmond de Rothschild has appointed Nathalie Wallace (pictured) as chief sustainability officer, based in Paris. The firm said it believes that investments must have an impact on society, and has undertaken various ESG initiatives to demonstrate the fact.
Introduction: My name is Van Hayes, I am a thankful, friendly, smiling, calm, powerful, fine, enthusiastic person who loves writing and wants to share my knowledge and understanding with you.
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