The Social Origins of ESG: An Analysis of Innovest and KLD

Abstract

This article uses the study of two environmental, social, and governance (ESG) data vendors—KLD and Innovest—to exemplify the “social origins of ESG issues” argument made by Eccles and Stroehle in their 2018 working paper “Exploring Social Origins in the Construction of ESG Measures.” Based on in-depth interviews with the organizations’ founders and historical document analysis, we recap the history of the cases and show how different origins, philosophies, and “purposes” of ESG issues shaped the methods and data characteristics of two of the most important data vendors of their time. We discuss why MSCI chose to continue with the financial value–oriented methodology of Innovest while discontinuing the values-driven KLD methodology. Through an in-depth literature analysis, we further show that not only the creation but also the use of “nonfinancial performance” concepts rely on processes of social construction. We also show that investors use different ESG data from those used by academics, potentially leading to misaligned narratives. Finally, with this article we join the call for more explicit contextualization of ESG data, highlighting that both practitioners and academics need to better understand the social construction that underlies analyses that use different concepts of ESG.