ESG criteria: what do they mean and why are they so important?

To understand the origin of ethical investments, we have to go back more than fifty years, specifically to the time of the Vietnam War. This armed conflict sparked a wave of university protests across the United States demanding an end to educational institutions’ investments in military companies. This was the origin of so-called “ethical investments.” In the late 1990s, the progress of sustainable investment was a reality, and it was decided to launch the Dow Jones Sustainability Index, the first global index to introduce sustainability criteria. Shortly after, the United Nations (UN) took a major step with the launch of the Principles for Responsible Investment, based on six key premises for organizations and companies worldwide. The concept of sustainable or responsible investment had come to stay. But what does an investment require to be considered responsible? It must meet environmental, social, and governance criteria known as ESG, to ensure its future profitability and survival. ESG criteria encompass:

1. The environmental factor (Environmental), to make decisions based on how companies’ activities affect the environment.
2. The social factor (Social), to consider the impact that the company’s activities have on the community, for example, in terms of diversity, human rights, or healthcare.
3. And the governance factor (Governance), which studies the impact of shareholders and management themselves, and is based on issues such as board structure, shareholder rights, or transparency, among others.

These criteria are the backbone of any responsible and ethical investment by organizations, also now standing as indicators of a brand’s quality and commitment to society as a whole. In Europe, the term began to be used around the year 2000 as socially responsible investment, and by 2014 it was estimated to already involve financial funds of 100 billion euros. The country where it has spread the most has been France, followed by the United Kingdom, Switzerland, Belgium, and Germany. Globally, it is estimated that it can attract investments of 300 billion euros per year. Currently, the concept is very topical in Europe, and in fact, on March 10, 2021, Regulation (EU) 2019/2088 came into force, a regulation that requires participants in financial markets, organizations, and financial advisors to report on the sustainability risks of the companies they manage, and in all their production processes. The directive will also affect the activity of any organization whose activity involves the generation of CO2 and polluting waste, or consumption of natural resources, such as water, fossil fuels, biodegradable materials, etc. That is, any pollution that generates an impact on the environment. In this regard, the Global Sustainable Investment Review report is published every two years to compile data worldwide and assess progress.