October 17, 2022

Prioritizing the ‘G’ in ‘ESG’

Good governance helps boards meet ESG risks and opportunities.

Spurred by the pandemic, the momentum continues to grow toward prioritizing Environmental, Social, and Governance issues and investing.

Corporate governance has taken a backseat to the more headline-worthy environmental and social issues, with governance—and all its fiduciary responsibilities, transparency, and compliance—being relegated mainly to risk mitigation.

But savvy board members, and ESG investors, know that the ‘G,’ governance, is the most important component, because good governance determines the strategic direction and success of environmental and social initiatives.

Traditionally, corporate governance has been the domain of the organization’s shareholders, who use it as a tool to increase their returns. Any resulting environmental or social improvement is welcomed, but not essential. Clearly, this isn’t the most effective way to promote and prioritize the social and environmental components of ESG. It’s not how the necessary changes will get made.

To really impact the E and the S, boards need to strengthen the G.

Bringing the ‘E,’ ‘S,’ and ‘G’ Back Together

Good governance is how board business gets done and how businesses succeed and grow. Governance determines not only the decision making, but the decision makers. It’s vital to the implementation of effective environmental and social strategy.

The road to understanding and overcoming environmental and social risks and opportunities is paved with good governance. It’s time for governance to take some of the headlines back from environmental and social considerations.

ESG investors are paying close attention to companies’ environmental and social impact, and their commitment to improving both, and are basing their investment decisions on that. They want companies to be proactive about ESG risks and opportunities—investors and consumers are demanding less talking and more action. Boards and management teams are under increasing pressure to demonstrate how their strategic decisions will impact all their stakeholders, not just shareholder profits.

Critics argue that, while many companies have been very outspoken about their commitment to environmental and social issues, in practice they’re doing very little to facilitate any real improvements.

Again, good governance practices can help. Boards with effective governance processes in place ensure accountability to all their stakeholders. Good governance supports transparency, encouraging boards to make decisions that lead to meaningful impact on environmental and social issues. And boards with a solid foundation of good governance are more agile and can easily pivot to address and act on new risks and opportunities.

Organizations recognize that they need to broaden their traditional focus on shareholder return, and tackle environmental and social issues, for the long and short term. They need to understand their impact on the environment of every aspect of their business strategy and performance, from cradle to grave: Is your product ethically sourced? How do you handle recycling/waste management? Does production increase water or air pollution in communities? Do you and your manufacturers and suppliers pay a living wage?

ESG Issues move markets. They’re no longer abstract concepts that are off in the future. From climate change to water scarcity to human rights injustice, the effects of ESG issues are being felt right now.

Boards are responsible for the organization’s long-term performance, and it’s crucial that they understand that good governance is what drives successful environmental and social strategy.

Effective ESG Committees

Most modern boards have created ESG committees that are responsible for implementing the board’s ESG strategy. The committee gathers all the information the board needs to increase their ESG competence and make well-informed decisions. It evaluates and prioritizes the information that it shares with the board.

ESG committees should include executive leadership and budget/financial experts, as well as various stakeholders. The chair should be led by an ESG expert, who has a clear understanding of the specific ESG risks and opportunities that the organization faces. The ESG committee should have unfettered access to all parts of the business—from the c-suite to the factory floor—to ensure they have all the relevant information they need. The ESDG committee is responsible for completing the ESG pages in the company’s annual report.

The goals of the ESG committee should be to prioritize the importance of ESG issues throughout the company, ensure oversights of ESG issues. and to follow robust governance practices that support environmental and social initiatives. Forming an ESG committee will integrate ESG considerations into the overall business strategy.

Good Governance is the Foundation for Meaningful ESG Impact

Forward-looking boards recognize that ESG issues have gone mainstream. And investors are convinced that a board’s proactive approach ESG risks is a reliable barometer for long-term growth and profitability.

Good governance informs and supports the organization’s performance on environmental and social initiatives. Boards with good governance processes in place are setting their organization up for long-term success. 

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