Standards & Certification

Not all standards are certifications – the example of ESG

Some of the most visible standards in the world happen to be certifications. The best example is the International Standarisation Organisation’s (ISO) quality-oriented ISO 9000, which is probably the most widespread certification scheme in the planet.

And yet, not all standards are certifications.

My favourite example of a non-certification standard is the latest trend in the field of responsible investment (RI), called ‘Environment, Social, and Governance’ risk (ESG).

In the words of an expert, “the key distinguishing feature of socially responsible investment lies in its combination of social and environmental goals with the financial objective of achieving a return on invested capital approaching that of the market”.1 The general idea is thus to incorporate non-financial considerations as norms to guide investment. What ESG does is to provide a vehicle to incorporate specific environmental, social, and governance considerations.

There is still a fair deal of progress that needs to be achieved by ESG. In particular, it remains to be seen if the risk posed by non-financial indicators can be accurately measured a priori. However, ESG is catching up. For example, the United Nations Principles for Responsible Investment (UNPRI) saw the light of day in 2006 when 400 investors totalling assets of over 15 trillion US dollars agreed to six principles aimed at the inclusion of environment, social and governance (ESG) risk considerations into their decision-making processes.2

Alongside its popularisation, the ESG considerations being used become part of a set of standardised guidelines that ought to be considered in the process of investing. Or, in other words, alongside its popularisation, the use of a risk analysis framework with an ESG component becomes a standard.

  1. Sparkes, 2001, 201.
  2. De Graaf & Slager, 2006, 3.