Who Put the ‘S’ in ‘ESG’ (and What Does It Mean)?

The three pillars of so-called ESG investing have never been equals. The “E,” for environmental, has dominated the “S” for social and “G” for governance, reflecting concerns about climate change. Now, the coronavirus pandemic has given the S a big boost, with social bonds becoming the fastest-growing part of sustainable finance. Some of those bonds are earmarked for vaccine development or defraying crisis costs. But more broadly, there’s a new focus among investors on how companies treat their workers and how they benefit society. The risk of brand damage for companies seen as engaging in anti-social behavior has also increased.

There are many variations, but the common thesis is that capitalism has obligations that go beyond shareholders and return on equity -- investors and companies also need to consider their impact on customers, employees, local communities and society in general. While different strands of the social investing movement may focus on labor standards, LGBTQ rights or corruption, they’re meant to send a common message: Businesses need the consent of people in society to operate, and a threat to this “license” can have an impact on their bottom line.