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ESG - Then and Now

Taking a holistic approach to sustainability, ESG focuses on not just environmental aspects but also social and corporate governance factors.

  • Environmental: ESG's environmental dimension focuses
    on an organization's environmental impacts and risk management practices. Among the factors considered are direct and indirect greenhouse gases, natural resource stewardship, and the company's resilience to physical climate risks.
  • Social: the social aspect refers to an organization's relationships with stakeholders and its overall impact on the communities in which it operates.
  • Governance: the governance aspect pertains to how a company is managed and led in a transparent and accountable manner by its management team.

ESG did not emerge at a single moment in history but rather was the culmination of many initiatives aimed at fostering sustainable development over time. Research suggests that the first form of ESG originated in the 1960s when investors excluded tobacco or apartheid-related stocks from their portfolios.

Later versions of the ESG movement can be seen in the Environmental, Health and Safety regulation in the 1980s in the United States. As part of this initiative, a regulation was developed to manage and reduce pollution caused by economic growth. The Corporate Sustainability movement emerged later in the 1990s as an evolution of EHS. As a result, management sought to reduce the firm's environmental impact beyond the legal requirements. As Corporate Social Responsibility took shape in the early 2000s, firms began to think about how they could respond to social issues. Finally, in the 2010s and well into the 2020s, ESG started to emerge as a much more proactive movement.

Modern-day ESG in Europe encompasses a complex field of regulatory requirements. In the European Union, the first notable framework for sustainable development was introduced in 2015 – the Paris agreement. Here, a global framework with one goal was set – limiting global warming to well below 2°C compared to preindustrial levels, and pursuing efforts to limit it to 1.5°C. However, in order to achieve this, a more actionable plan was needed.

In December 2019, the European Commission presented the roadmap for a climate-neutral Europe - the Green Deal. It offers a set of policy initiatives to make the European Union fully climate neutral by 2050. A greenhouse gas emission reduction target of at least 50% and up to 55% is set for 2030 as part of the impact assessment plan. Existing laws will be reviewed on their climate merits, and relevant legislation will be introduced on circular economies, building renovation, biodiversity, and farming, as well as innovation.

In 2021, the European Commission adopted a package of legislative proposals "Fit for 55" as part of the European Green Deal, which seeks to revise and update EU climate, energy  and transport legislation that will contribute to the EU's climate goals of reducing net greenhouse gas emissions by at least 55% by 2030 and reaching climate neutrality by 2050. 

In the meantime, many other legislations were born, addressing different aspects of the path to reaching sustainability goals. Each of them addresses ways to reorient capital flows towards sustainable investment, ways to manage financial risks stemming from climate change and social issues, as well as how to foster transparency and longtermism in financial and economic activity.

These include the following:

  • EC Action Plan for Financing Sustainable Growth
  • EU Taxonomy & Disclosure Regulation
  • EBA Mandate & Action PlanUNEP FI Principles of Responsible Banking
  • EC Consultation on Green Bond Standards
  • EC Consultation on Sustainable Governance
  • Renewed Sustainable Finance Strategy
  • ECB's Guide on Climate-related and Environmental Risks
  • EBA Pillar 3 Disclosure Requirements
  • Proposal corporate sustainability reporting directive (review of non-Financial Reporting Directive)
  • EBA Guidelines on Loan Origination
  • BCBS principles for the management of ESG risks
  • Corporate Sustainability Due Diligence Directive
  • EFRAG & ISSB Reporting Standards

It is only through these actionable plans that ESG has come to fruition. ESG is more than a word; it is a story with one final destination - a sustainable world with no person and no place left behind.

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RBI Regulatory Advisory

Raiffeisen Bank International AG | Member of RBI Group | Am Stadtpark 9, 1030 Vienna, Austria  | Tel: +43 1 71707 - 5923