The concept of socially responsible investing has played a role in the global economy since the 1960s. However, it was not until the 2004 United Nations Global Compact Report that the concept would be formally named environmental, social, and governance (ESG). ESG investing, which has its roots in the corporate social responsibility movement, attempts to address the shortfalls of capitalism by tying a corporation’s performance or action on environmental and social issues to investment decisions. When leveraged properly, ESG investing aims to acknowledge or quantify for investors a corporation’s efforts on climate, sustainable development, fair treatment of workers, diversity and inclusion, and other noneconomic factors.
November 01, 2023
The evolution of ESG: How environmental justice is strengthening the movement
Ravay Smith, Shannon Morrissey, and Brandon Roul
The rise of ESG
In recent years, especially since 2020, ESG investing has gained attention and value, allowing many corporations to leverage the concept of ESG reports and public statements to boost not only their brand but also their market value. Though the anti-ESG movement has noisily gained steam over the past year, it does not appear that the tide has shifted away from ESG investing. ESG funds have held strong during 2023, even during a broad market withdrawal, and, importantly, customers and stakeholders continue to demand ESG investing options.
The “E” and “S:” Environmental justice
Environmental justice sits at the intersection of the “E” and the “S.” Environmental justice is defined by the U.S. Environmental Protection Agency (EPA) as “the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.” Although environmental justice is not a new concept, it has gained increasing recognition in recent years—due in part to the heightened attention to ESG generally, and the Black Lives Matter movement. Environmental justice principles may be used to address environmental racism and climate change within existing legal frameworks, including at the federal and state levels. For example, in May 2023, New York passed a law prohibiting issuance of certain project permits if the project will cause or contribute a disproportionate pollution burden on a disadvantaged community. Environmental Conservation Law (ECL) § 70-0118.
With the passage of these types of laws in some areas of the country, especially major markets like New York and New Jersey, companies are starting to pay more attention to environmental justice. The Biden administration has also made environmental justice a priority, enhancing the existing requirements for every federal agency to consider the environmental and health impacts of agency decisions and activities on communities. Federal agencies must work to prevent negative impacts, by, for example, prioritizing enforcement in environmental justice communities. In addition, the Inflation Reduction Act allocated billions of dollars toward addressing environmental justice issues, through environmental and climate justice block grants.
Environmental justice and corporations
Companies should pay attention to these trends, especially if their industry or operations have historically had a disproportionate impact on underserved communities. There are three primary reasons why companies should consider environmental justice as part of their ESG initiatives. First, not acting on environmental compliance in underserved or overburdened communities could have tangible legal impacts. Under its updated enforcement initiatives, EPA may be likelier to seek more severe penalties if a company is found to be in violation of traditional environmental statutes such as the Clean Air Act or the Clean Water Act and such violation occurs in an overburdened community. Second, in states with environmental justice laws, companies may be required to meet additional permitting requirements for new projects or expansions, such as conducting environmental justice assessments using tools like EPA’s EJScreen, or expanding public engagement efforts. Added regulatory requirements can cost companies significant time and money, and some legal requirements could even terminate projects found to contribute to disproportionate pollution burdens. Third, even in a profit-driven economy, companies should carefully consider the impact their operations or products have on communities where they operate to sustain their operations in the longer term. Just as corporations are now paying attention to climate change and seeking to reduce their carbon emissions to ensure a healthy environment for future generations, companies should also ensure that their operations do not hinder the ability of communities to thrive for generations to come.
In the current ESG era, corporate commitments to sustainability and diversity also demand commitments to environmental equity. The significant growth of ESG investing and the momentum of environmental justice laws and policies in recent years is a strong indicator that “we the people” (not the corporation) must again become a priority in modern society. Our individual and collective responsibility to future generations requires serious action on environmental equity.