The environmental, social and governmental criteria (ESG) are “a set of standards for a company’s operations that socially conscious investors use to select potential investments. Environmental criteria take into account a company’s performance as a steward of nature. Social criteria examine how the company manages relationships with employees, suppliers, customers and the communities in which it operates. Governance deals with corporate management, executive compensation, audits, internal controls and shareholder rights.”
Sofía Sielfeld O.
In the current international context, social and environmental concerns have increased considerably, especially in view of the strong global changes that have taken place over the last two decades. It is in this context, that the international community has sought to propose economically viable solutions that encourage governments, as well as public and private entities, to make the necessary changes to produce a positive impact on these issues.
Thus, since the early 2000s, the idea of ESG began to emerge, and in 2005 the United Nations, within the framework of the United Nations Environment Programme Finance Initiative (UNEP FI), commissioned the preparation of a report on the applicability of ESG criteria with respect to investors, whose conclusion was that, not only were these criteria fully applicable and incorporable to investment companies, but that this was also arguably part of their fiduciary duties.
In 2019 the European Union approved the Regulation on the disclosure of information related to sustainability in the financial service sector (SFDR, Reg. EU 2019/2088), which entered into force in March 2021, and allowed for greater certainty regarding the level of ESG implementation in investments. Regarding said levels, three are the posible classifications, according to which article they fall under, these are: “without sustainability objectives” (article 6), that it “promotes social and environmental initiatives along with traditional performance objectives” (article 8), and “with explicit sustainability objectives” (article 9).
This is particularly relevant considering the so-called responsible or sustainable investments and the impact investments sought by different investors. The former are investment vehicles that include certain social and environmental considerations in their portfolio, but that do not limit their investments according to these criteria, i.e. following art. 8. While the latter are comprised by those investments in companies, organizations and funds that seek to achieve a measurable social or environmental benefit for the community, while obtaining a financial return for the investor, i.e., being classified according to art. 9. In both cases the tools used to measure whether there is indeed such a social or environmental consideration, are the ESG criteria.
Joining this growing trend, more and more investment vehicles and Asset Managers are seeking to expand their implementation of the aforementioned criteria. For instance, Morgan Stanley Investment Management, through its subsidiary Calvert Research and Management (Calvert), is currently seeking to improve its implementation of ESG criteria to the standard of Art. 9 SFDR, through responsible investment strategies based on research, data analysis and direct engagement with companies in order to deliver competitive results across all asset classes, as explained by their team.