Can three simple letters represent one of the biggest hopes for the humankind?

Yes, if those letters are known as ESG, an acronym which stands for Environmental, Social and Corporate Governance.

This is an amazing story which allegedly started in 2005, when the then United Nation Secretary General Kofi Annan asked a few leading financial institutions to submit a list of criteria for responsible investments. In less than a decade, ESG became an investment approach in which a range of sustainability and ESG-related risks and opportunities are considered in addition to traditional financial analysis.

The trend to use ESG criteria in the investment decisions has been relentless and on January 14, Larry Fink, the chief executive officer of BlackRock, the world’s largest fund manager, overlooking at almost $7tn in assets (almost equivalent to the combined GDP of UK, France and Italy) publicly stated that his group will implement ESG as a key element of the investment selection process. 

So why is ESG so important for the broad public and, eventually, for our species?

To answer this question, we need to broaden our horizon and look at some of the trends shaping the path of our civilisation. 

The global population totalled 7.6 billion in 2018, and the number will rise to an estimated 9.7 billion by 2050. The urbanisation rate, which measures the number of people living in cities as opposed to the ones living in rural areas, will increase from 82 to 89 per cent over the same time horizon. The relevance of the latter trend is linked to the fact that consumption patterns are affected: people in urban areas tend to consume 2.5 times more than people living in rural zones. Finally, the wealth of the individuals at global level has increased significantly over decades, triggering an increase of the per capita consumption. 

These chains of trends and results have many angles – most are clearly positive ones and trace back to the bones of the modern civilisation: the industrial revolution, the increase of technological achievements, including a deeper medical knowledge extending life expectancy, and the decrease in poverty, especially in the emerging markets economies, notably in Asia and South America.

Nonetheless, it is clear those secular trends are all having at least one effect: the acceleration of individual average consumption, which then gets multiplied by the increasing number of people on our planet. The increase in world consumption is met by more goods and services produced globally, which requires the use of more energy. 

Energy is still very much linked to fossil fuel combustion, which releases carbon dioxide, also known as CO2, responsible for trapping the sun’s heat, causing the greenhouse effect and alimenting temperature increases. Finally, our planet has limited resources, and even if technology might grant their more efficient use overtime, they remain limited by nature. 

So the key question is if the journey of humanity towards the future is a sustainable one or if our species, because of greediness, is doomed to extinction. By considering the negative consequences of the increase in world consumption, global warming and the depletion the planet resources, the sustainability of our economies appear to be the only possible way forward for humanity. 
What is driving the decision of large corporations and of their executives? 

Money, of course, and money is allocated by the financial markets and by the financial players into the broader economy. This is why Kofi Annan initiative, with the ESG advent, represents a revolution which has started reshaping not just financial markets but also the other industries and economic sectors, forced to take into account sustainability in order to access financial resources.

The financial markets’ main mantra has always been to make profit. Critics have been blaming bankers and other financial professionals for focusing on short-term profits without having a long-term horizon in their investment decisions, eventually causing problems to the system as during the 2007-2009 crisis. This is almost scientifically true, as investment decisions have for long been taken by looking at only two factors: risk and return. Trillions of dollars have been allocated over decades according to a bi-dimensional approach lacking a long-term perspective.

In the second decade of the 15th century, an Italian designer and architect, called Filippo Brunelleschi, introduced perspective for the first time in one of his paintings. Art has never been the same ever since, and the representations of reality provided by paintings started to be drawn with a sense of depth, closer to the way that our minds are used to see the world: in three dimensions. Brunelleschi started one of the most important art revolutions in history, the Renaissance, which left humankind with a treasure of masterpieces of unmatched beauty.

After 2005, ESG has immensely contributed to the capital markets asset allocation by adding a third dimension: the long-term horizon of the sustainability criteria in the investment decision process. ESG is the renaissance of finance. 

If sustained by policymakers’ action and public support, ESG can provide humankind with the valuable treasure of making its existence less uncertain.
  

Simone Russo is co-founder and CEO of Amagis Capital, founder of the Heart4Earth Charity Foundation, and previously managing director at Goldman Sachs International.