The engine that powers sustainable organisations
Often in the discourse around ESG, the Governance aspect fades into the background, overshadowed by the prominence of ‘E’ and ’S’. Governance, however, is the bedrock for solid ESG performance and the rest of the business, for that matter. In ESG, Governance means how an organisation makes decisions, manages risks and opportunities, follows its values, stays transparent, and keeps its systems and things safe. It includes processes, policies, and practices as well as management structure.
Oversight and accountability are important issues in governance. Investors and regulators are looking at:
Taken in the ESG context, oversight, and accountability of ESG issues should be a part of senior management’s responsibilities, with more and more companies tying executive remuneration directly to ESG-related KPIs. Governance watchdogs want to see that there are appropriate incentives for risk management, including of ESG issues which should be treated as business risks.
As it goes, transparency is vital to ensure accountability. The governance practices of an organisation should be accessible to scrutiny, with clear insight into decision-making processes and outcomes, motivation and participation mechanisms, channels for whistleblowing and remediation.
Transparent ESG reporting has evolved to become a governance tool, with reporting quality itself an indicator of strength of governance.
Diversity, equity, and inclusion (DEI) is a hot-button governance topic these days. DEI indicators, such as gender diversity, age makeup, background and skills, are especially important at the board level, where these factors determine the competency and resilience of the leadership team. The link between DEI and business performance has been well-established, proving that more diversity leads to better innovation and financial wellness. DEI policies and practices have a direct effect on the organisational culture, affecting team synergies.
Governance has shifted from a pure financial perspective towards stakeholder value creation that encompasses non-financial aspects, including ESG. These trends combined are facilitating an era of shareholder activism where shareholders are holding companies accountable for non-financial issues traditionally not on executives’ radar, using their shareholder privileges to influence decision-making and management priorities.
Certain topics like cybersecurity, data privacy, and ESG dominate governance concerns, influenced heavily by regulatory developments and economic urgencies. Good governance is defined less by how these matters are handled than how ready the governance ecosystem is designed to face these pressures. Getting the ‘G’ in ESG right is pivotal to managing the ‘E’ and ’S' and other material business matters.