Is Governance the “Bedrock" of ESG?

The past few years have seen an impressive increase in interest around the topic of Environmental, Social, and Governance (ESG). Champions laud ESG as a much-needed data framework to measure sustainability-related business risks. Skeptics claim it is a mechanism to advance socially preferred behaviors on companies who should simply be focused on the bottom line. The one constant that should remain true throughout both sides of this debate is: good governance is good business.

Defining “Governance" through an ESG lens

Ask any practitioner how they define “ESG” and you are likely to hear answers comparing it to sustainability or identifying financially material issues by analyzing non-financial data. Take it one layer deeper and ask to define E, S, and G and you will hear data points on GHG emissions (E), DEI standings (S) and then... the G.

Governance has typically been the fickle field that is nuanced to describe – especially if ESG is managed in a silo. To define Governance in the ESG context there are two key areas to consider:

1. Governance as the ESG foundation

The Value Reporting Foundation, the organization that develops the SASB Standards, outlines the “Four Pillars of ESG Management”. The first on the list? Governance: a corporate governing body’s ability to manage ESG performance. The remaining three pillars are: Strategy, Risk Management, and Performance Metrics and Targets.

2. Quantitative and qualitative governance metrics

When looking specifically at how to measure the “G” the SASB Standards also shed light on topics such as Critical Incident Risk Management, Systemic Risk Management, Legal and Regulatory Risk Management, and Business Ethics. Each comes with a description of the line-item disclosure topics that are relevant to investors who take ESG into account during the valuation process.

Culture, culture, culture

At NAVEX we see Governance as the bedrock of ESG. Not solely in the sense that board-level strategy for managing ESG is fundamental, but also in the sense that good governance drives good culture. And good culture drives good business.

It is a significant endeavor to measure ESG risks, but how will you ultimately mitigate ESG risks? That is where culture may have the single largest impact. Through ethics and compliance mechanisms such as policy creation, codes of conduct, incident management and employee training, companies have a powerful opportunity to address ESG risks – particularly “S” and “G” risks like DEI, anti-bribery and corruption, and modern slavery – the list goes on!

This is also a perspective that courageously breaks down silos inherent to ESG. ESG becomes more than a green-tinted PR campaign, or exercise in carbon foot-printing. It becomes the way the business operates in such a way that prioritizes ethics and the impact of employees, communities, third parties, and the environment.

The result is a business that is better at attracting and retaining top talent, is less vulnerable to compliance fines across a variety of issues, is protected from negative brand criticism, and can manage natural resources in the most cost-efficient way. The companies that lead in this area – especially in an ever-growing risk landscape – are the ones that will remain resilient now, and well into the future. It starts with good governance.

To learn more about how to get started with ESG download:

Definitive Guide to ESG

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