The Origins of ESG

What is the history of ESG? 

Historically, the term ESG, as well as the widespread and formalised use of ESG measurements in investment decisions, started in the early 2000s. The term ESG was first developed in a 2004 report by 20 financial institutions in response to a call from the Secretary-General of the United Nations. Between 2015 and 2020, there was a sevenfold increase in cash allocations. ESG is a popular investment topic in public markets.

How does ESG relate to venture capital? 

ESG is slowly starting to play a role in the world of venture capital. A recent survey of the European Investment Fund found that 70% of VCs use ESG in the investment decision making process, a number which indicates an interest in the topic. In our day-to-day work with VentureESG, pinning down exactly what it means to “adhere to ESG principles” still seems to cause some trouble for most VCs. Practitioners themselves and commentators talk about sustainable investing, responsible finance, and indeed ESG and impact, often interchangeably. Specifically, for VC, there is a general lack of a universally accepted definition, standard or methodology when it comes to ESG. This, naturally, is something that needs to be rectified.

What are the challenges around measuring ESG?

Although ESG rating and scoring agencies have institutionalised ‘measuring ESG’, they are arriving at vastly different ratings, thereby undermining the credibility of ESG assessments altogether and opening the door for greenwashing or ESG-washing - talking about ESG but not practising it correctly. This is a term which we are seeing used more and more these days and which refers to the deceptive practice of implying, through marketing or other means, that a company’s operations and products are more environmentally or ESG-friendly than they actually are.