The 'G' in ESG
The ‘G’ in ESG
‘ESG’ is possibly the most zeitgeist business expression of the last 12 months. Companies around the world are engaging with the climate crisis as never before and launching social engagement programs for their employees, local communities and far flung pockets of the developing world. The E and the S seem to be well covered (in word if not quite yet in deed).
In many cases though, the G is largely skipped over. It’s just not quite as photogenic as saving turtles in Costa Rica. However, we would argue that the G – for Governance – is the foundation that unpins every other ‘E’ or ‘S’ initiative a company undertakes. Why? Because governance forms the very running of the company from which every other decision flows. The first step to embedding ESG must be taken by the Board and senior management, taking on the responsibility and accountability to drive the transition towards becoming an environmentally and socially responsible business.
What exactly is governance?
Governance covers everything related to how companies are run and how corporate managements and boards relate to different stakeholders. It is the set of rules, systems, structures, and policies governing a business or corporation. KPMG refers to it as both how a company conducts itself along with its license to operate; quite simply the better run the company, the more likely it is to succeed.
Governance rules should cover a host of considerations including:
- Executive pay
- Bribery and corruption
- Treatment of whistle-blowers and their allegations
- Political lobbying and donations
- Board diversity and structure
- Tax strategy
- Data breaches
- Oversight of long term risks and opportunities
- Crisis management
- Supply chain management has recently entered the boardroom as companies expand across national boundaries. When a company outsources its production, services, or business processes, it also outsources its corporate responsibilities and its reputation – proper vetting of suppliers, relationship building and board level understanding of what a responsible supply chain looks like will be evermore important as the ‘E’ and ‘S’ become ever more part of the corporate operating fabric.
Governance and Beyond
Along with the above regulatory and compliance issues we also liked a recent Harvard paper’s comment that “Directors…should be mindful of good corporate governance strategies and consider implementing strategies beyond the yardstick of the law.” (our italics) Businesses seeking to engage fully with ESG should look beyond what has been mandated and search for additional projects that engage with the spirit of ESG rather than just the technicalities. Another report we found – this time by McKinsey - puts it perfectly when it says “excelling in governance calls for mastering not just the letter of laws but also their spirit—such as getting in front of violations before they occur, or ensuring transparency and dialogue with regulators instead of formalistically submitting a report and letting the results speak for themselves.”
It used to be that board members answered to their shareholders and, provided their actions were legally compliant, that was really as far as accountability went. That has changed dramatically with decisions made now regularly attracting attention from consumer-led action groups, interested media and government watchdogs. Governance has become an issue of public interest and the once hallowed shareholder votes are giving way to a much broader stakeholder consensus in which everyone feels entitled to have their say.
EVERYTHING STARTS WITH THE G
As we said at the beginning, we believe that ‘G’ is the underpinning for any effective ESG policy – regardless of whether you are a micro-enterprise or multi-national, direction and energy have to come from the top. Through its governance, a board has to ensure that any green or sustainability claims made by a company have to adhere to the Green Claims Code meaning that environmental policies have to be enacted rather than simply announced. Robust ethical governance around supply chain issues means that your network of outsourced workers are treated with respect and paid fairly. That same good governance also means that any raw materials you might use are sourced responsibly. Looking more closely at your supply chain automatically leads any genuinely engaged board to consider the end of life processes and opportunities for clean disposal and recycling – or better still closed, loop circular options.
The reality of day to day governance is rather more nuanced than these examples, and certainly less utopian, but they demonstrate how all 3 pillars of ESG overlap and lean on each other – but need the leadership of the ‘G’ to have any meaning or direction.
Every company needs governance, you wouldn’t function without it. But as we hope we have shown, governance isn’t simply managing the day to day – it’s about choosing a set of policies that actively participate in the world around us and choose to make it a better place. Whether you choose to focus more on the S or on the E, or a combination of both, everything starts with the G.
We have plenty of resources on where to go next in terms of your ESG strategy - starting with our Guide on establishing your ESG commitments.
As everything starts with the G, we also have resources on how to fully embed ESG across your company, from the board room down in our two part series on ESG leadership, along with a focus on the social aspects of ESG.