October 28, 2019

In 2004, Kofi Annan, then secretary-general of the United Nations, invited 50 financial institutions to endorse a report titled, Who Cares Wins. In it, Mr. Annan concluded companies that are well managed with regard to environmental, social, and governance (ESG) issues should compete more successfully and increase shareholder value. Those that don’t may not be able to weather regulatory changes or stakeholder actions. In addition, such businesses tend to miss growth opportunities such as accessing new markets.

Who Cares Wins reminds us responsibly-managed companies should contribute to a “sustainably-managed society.” To some, this sounded a lot like the many failed Economically Targeted Investment programs of the same era, which encouraged consideration of a “double bottom line.” On the contrary, Who Cares Wins argued there should be a direct relationship between good ESG management and good financial management. But it has taken more than a decade for thought leaders to explain how this relationship might work. From this report
emerged the United Nations Principles for Responsible Investment (UNPRI) in 2006.

The UNPRI consists of six principles designed to align investors with “broader societal goals.” These principles form the conceptual scaffold around which signatories might build their
internal ESG processes. The adoption of these principles has been noteworthy: from 100 at the outset to more than 2,300 today, including some of the largest asset managers in the world. While today’s headlines reflect plenty of disagreement about what the “broader societal goals” should be, the growth in adherents to the UNPRI mirrors a broader consensus that market failures are not as uncommon as some investors might like to believe.

 

Secretary-General Annan was not the first to suggest companies could do well by doing good. The search for a relationship between ESG and corporate financial performance (CFP) traces back to the 1970s. Scholars and investors have published more than 2,000 empirical studies and several review studies on this relation since then. One paper has reviewed the findings of nearly all of them. Roughly 90% of studies reviewed reported a positive relationship between ESG and CFP. Moreover, the positive ESG impact on CFP appears stable over time.

Eleven years after Who Cares Wins, all UN member states adopted the 2030 Agenda for Sustainable Development. This document provides a “shared blueprint for peace and prosperity for people and the planet.” At its heart lie 17 Sustainable Development Goals (SDGs), which are based on the premise growth can better be achieved by alleviating poverty, reducing inequality, addressing climate change, and transitioning to a low-carbon economy. In essence: Growth needn’t be a zero-sum game.

Download the full paper here: