November 10, 2005
One Year On: Global Compact Maps Progress on Mainstreaming ESG Considerations
by William Baue
Two recent reports paint a vivid picture of developments over the past year on integrating
environmental, social, and governance considerations into traditional financial analysis.
Over a year ago, the United Nations Global Compact released a report
entitled Who Cares Wins that documented the ushering in of the era of transfusing socially
responsible investing (SRI) practices into the lifeblood of mainstream financial institutions.
Recently, the Global Compact issued a follow-up report--"Who
Cares Wins": One Year On--which reviews and maps progress over the past 12-odd months on the
integration of environmental, social, and governance (ESG) considerations into traditional
investment analysis. Perhaps more importantly, late last month the International Finance
Corporation (IFC) issued a conference report detailing the August 25, 2005 meeting at which the
One Year On report (which the IFC collaborated in producing) was released.
"Encouragingly, the past twelve months have witnessed a number of significant
developments within the financial sector, which taken together represent an important step towards
to the integration of ESG issues into analysis, asset management and securities brokerage," states
the One Year On report.
The report points to a number of societal developments
driving increasing uptake of ESG issues, such as the January 2005 implementation of the European
Union Emissions Trading Scheme (ETS) bolstering a carbon
market and the February 2005 implementation of the Kyoto Treaty. The
focus of the report, however, is to "map" investment arena developments pushing or illustrating ESG
"In at least some areas, ESG-related investment has achieved a fashionable status
in recent months," the report states. "For example, in a trend mildly reminiscent of the internet
era, it has been possible for a number of conceptual 'clean technology' companies, lacking either
tangible revenues or assets, to gain easy access to investors' capital."
attractive returns have helped stimulate investor interest, there is a danger that this interest
could rise and fall along with the returns, unless the underlying spirit of ESG integration is
properly embedded," the report continues. "It is important to ensure that the current vogue for
clean technology investment does not overshadow consideration of other environmental, social and
The sheer volume of major developments "mapped" in the appendix,
correlated to original Who Cares Wins recommendations as well as unfinished business,
impresses upon readers the significant ground traversed since June 2004. Examples of key
initiatives include the October 2004 launch of the Enhanced Analytics Initiative (EAI), the January 2005 World Economic
Forum (WEF)/AccountAbility publication of Mainstreaming Responsible Investment, and the May 2005
Investor Network on Climate Risk (INCR) "Call for
If the One Year On report paints the backdrop, the conference report
fills in the details with commentary and opinion from the actors who are actually implementing the
"We are today at a critical juncture: ESG considerations could attain
unstoppable momentum, but could also be pushed back by powerful forces interested in short-term
gains only (majority of institutional investors was seen as behaving this way; hedge funds were
mentioned)," the report, prepared by Ivo Knoepfel of onValues Investment Strategies and Research, states in note
"A key challenge was also seen in better institutionalizing financial
institutions' commitment toward ESG issues, versus the current status of single individuals or
teams leading the implementation process," the report continues.
IFC Environment and
Social Development Department Director Rachel Kyte, who noted that a "tipping point" on the
mainstreaming of ESG issues may be approaching, stressed that many ESG issues are even more crucial
in an emerging market context.
Ms. Kyte "often observes a disconnect between different
departments within the same financial institution: while the project finance people are often well
aware of the considerable environmental and reputational risks entailed in certain activities,
other investment banking or asset management departments seem to ignore them," the report states.
Extending this line of reasoning, Goldman
Sachs Managing Director Anthony Ling opined that "pigeonholing ESG as a separate category will
kill it" whereas "ESG will become mainstream within a five-year period" if consideration of these
issues proliferate throughout organizations.
Details of Mr. Ling's keynote presentation
represent the centerpiece of the conference report. Mr. Ling pointed out that combined commission
of the Enhanced Analytics Initiative, a consortium of institutional investors pledging five percent
of commissions to sell-side analysts producing the best research on ESG issues, fall well below
that of a big hedge fund.
The mainstream firms (including Citigroup, Deutsche Bank, Dresdner Kleinwort Wasserstein (DrKW), Goldman Sachs, HSBC, JPMorga
n, Morgan Stanley, and UBS) who have set up or significantly expanded ESG
teams in the last year are all based in London, according to Mr. Ling. He characterized the
results of the United Nations Environment Programme Finance Initiative (UNEP FI)-World Business Council for Sustainable Development (WBCSD)
survey showing how little young financial analysts care for ESG issues represents a "slap in the
face for all of us and highlights the need for active, personal leadership by those present in the
"To support awareness-building among young professionals entering the industry,
one participant proposed that all conference attendants commit to giving a presentation at a
business school or professional training course on ESG issues until we meet again next year," the
report states. "There was strong support for this proposal."