For Morningstar, Leslie P. Norton and Charity Blue write about the 20th anniversary of ESG investing, and its quick evolution from “non-financial” to quantifiable risk assessment.

In 2004, the UN Global Compact published “Who Cares Wins,” which discussed the concept of “environmental, social and governance” factors to describe these nonfinancial issues. It provided a systematic way of accounting for nonfinancial risks—the changing climate, say, or human rights violations―and rejected the view that investment should happen from a purely financial perspective. “In many cases, for example, responsible investors are compensating for a lack of effective public policy,” says Thomas Kuh, head of ESG Strategy for Morningstar Indexes.

Next, the law firm Freshfields Bruckhaus Deringer showed that ESG issues are relevant for financial valuation and consistent with fiduciary duty. That laid the groundwork for using ESG analysis. Its report was commissioned by the United Nations Environment Program Finance Initiative, the first of a number of studies showing that fiduciaries needed to consider ESG issues, when they were material.

The same UN body launched the Principles for Responsible Investment in 2006, creating a framework for institutional investors to incorporate ESG into their investment processes.

The Freshfields report “was a turning point. It said that not only are investment funds allowed to include nonfinancial factors, but that they arguably must, because the time horizon for what’s material to financial returns is long and nonfinancial factors present all sorts of risk and opportunities for investors,” says Lisa Cooper, founder, Figure 8 Investing Strategies. “Soon you had big European pension plans asking banks and asset managers to figure it out.” … Soon after, “Corporate Sustainability: First Evidence on Materiality” was published, which showed that focusing on financially relevant ESG factors had a positive effect on shareholder value. For example, “If climate change matters for investors’ decisions, then climate risk is material even if the company is not inclined to state that in regulatory documents,” says Kuh.

ESG Turns 20: A Brief History, and Why It’s Not Going Away | Morningstar

https://www.morningstar.com/sustainable-investing/esg-turns-20-brief-history-why-its-not-going-away