Background of the emergence of ESG

As we look at recent climate change events, many people have become alarmed that things can no longer continue this way.

Although scientists have been warning us about the climate crisis for a long time, people are only now beginning to take a keen interest in sustainability, and industry is also starting to change rapidly.

The discussion on sustainability and sustainable development began in the 1980s, when the industrialization of the West was accelerating and the environment was being destroyed.

It started with the Brundtland Report, Our Common Future, published by the World Commission on Environment and Development (WCED) of the United Nations Environment Programme (UNEP) in 1987, where sustainability was presented as a key agenda.

Afterwards, in 1992, government representatives from around the world adopted the Rio Declaration and Agenda 21, which contained a platform for action for environmental issues and sustainable development on Earth, at the UNEP conference.

In 2015, the UN General Assembly announced the Sustainable Development Goals (SDGs), which contain 17 goals and 169 detailed goals that the world must work together on in five areas: people, planet, prosperity, peace, and partnership by 2030.

As environmental issues became serious in the United States in the 1960s and 1980s, the demand for responsible environmental management and sustainable management by companies increased, and in order to provide guidelines for this, the US environmental groups CERES and UNEP established the non-profit organization GRI (Global Reporting Initiative) in 1997. GRI developed the GRI Standard, which is currently the global standard for ESG reporting, and announced it in 2016. Since then, companies have published and disclosed sustainability reports in accordance with these standards.

In order to achieve environmental and social sustainability, it was judged that changes in corporations, which have the greatest impact, were important, and the UN recognized the need for an organization to promote corporate environmental and social responsibility, and launched the UN Global Compact (UNGC) in 2000. However, more important than moving corporations were investors who invested capital in corporations, and so they began to demand responsible investment from them. As former UN Secretary-General Kofi Annan emphasized the need for responsible investment that considers environmental, social, and governance factors, the UN Principles for Responsible Investment (PRI) were launched in 2006 with the support of the UNGC and UNEP FI (Finance Initiative). The term “ESG” first appeared in the “Who Cares Wins” report, jointly prepared by the UNGC and approximately 20 financial institutions.

Despite these efforts, ESG management has not spread, but there were two triggers that brought about the current ESG craze. First, in 2019, at the BRT (Business Roundtable) annual meeting held by major U.S. companies, a new corporate purpose that integrates stakeholder values, ‘New Purpose,’ was declared, and 181 CEOs of major companies signed it. Second, in 2020 and 2021, Larry Fink, CEO of BlackRock, the world’s largest asset management company, sent a letter to investors and corporate CEOs declaring that “climate change and sustainability will be used as criteria for investment decisions” and that ESG funds would be expanded. This can be seen as an opportunity for global companies to begin making full-fledged efforts to transition to ESG management.

In addition, as the Green trend has emerged since 2020 and future generations have emerged as key actors in responding to climate change, consumer demands for ESG for a sustainable future have also strengthened, especially among the MZ generation, making ESG management essential for companies.

This phenomenon shows that the paradigm is shifting from the existing shareholder capitalism to stakeholder capitalism. In the future, companies will have to recognize that they can survive only by shifting from a management system that prioritizes shareholder profits to a management system that considers the interests of various stakeholders of the company, and they will have to find opportunities in achieving the Sustainable Development Goals.

<Kim Nam-hyun, Sustainable ESG Center>