What does the "G" in ESG actually mean?

written by

Emma Annies

Third blog post in the three-part series "What does ESG actually mean?". This post is about the "G" for "Governance".

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What does the "G" in ESG actually mean?

What does the "G" in ESG actually stand for?

The "G" in ESG stands for governance and includes factors such as corporate structure, board composition, business ethics and anti-corruption. Governance factors range from sovereign policy-making to the allocation of rights and responsibilities among an organization's various stakeholders, such as the board, management, shareholders, and stakeholders. How does the board conduct its business? Are there audit procedures and safeguards against bribery and corruption? How does the organization participate in policy initiatives? In this context, CEO compensation, auditing and shareholder rights are also part of corporate governance.

 

By definition, governance is an internal structure of carefully planned rules, regulations, practices and processes, all of which are directly related to the way a company is managed and governed. The systems and operational controls that make up internal governance are usually established at the board level. The latter is then responsible for implementing these strategic objectives, monitoring their effectiveness, and reporting regularly on the results to shareholders and stakeholders. Governance initiatives should reflect the company's values and have a proven positive impact on long-term performance and success.

 

Regardless of size or industry, companies must serve a wide variety of stakeholders, such as employees, customers, investors, as well as suppliers and government agencies. Governance, which encompasses all policies and practices for managing a company, is about making business decisions in a way that serves different stakeholders equally. To achieve this goal, governance-focused managers focus on accountability, transparency, and corporate responsibility. While the board of directors is primarily involved in shaping corporate policy and thus ultimately responsible for overseeing governance, managers at all levels ultimately contribute to governance compliance.

 

Yet shareholders are not the only ones interested in ESG investments. Consumers are increasingly making purchasing decisions based on a company's sustainability record. In the future, customers will reward companies that can demonstrate their commitment to the world and its people. Employees are also increasingly considering ESG concerns and the alignment of their personal beliefs with those of the potential employer when choosing a career.

 

While much of the interest has focused on environmental performance and certain social indicators - such as diversity, inclusion and equality - governance aspects have been given comparatively little importance in ESG discourse. Yet governance is not only a part of the ESG framework, but forms the basis for the implementation of "E" and "S."

 

For example, corporate governance has a significant impact on corporate social responsibility, as executives and board members acting transparently and ethically lead to a better understanding of social issues related to the brand. Similarly, the governance aspect is beginning to have an impact on environmental concerns. For example, the way a company makes business decisions with regard to climate change legislation is directly related to its environmental impact.

 

Behind every breach of a company's environmental or social commitments is ineffective corporate governance, be it inadequate anti-corruption practices, improper incentive structures, inconsistent lobbying activities, or poorly equipped leadership. In addition, governance affects the integrity of ESG disclosures by determining whether ESG indicators are tracked and reported ethically. Although governance attracted public attention during the initial waves of the anti-corruption movement, climate change and human rights in particular have dominated sustainability development in the corporate world. Nonetheless, effective governance is essential to ensure that the ESG movement's commitment is translated into concrete action and systematic change.

 

Governance reveals how ESG reporting will develop within the company in the coming years. Environmental and social responsibility can be measured and quantified in many ways, such ascarbon footprint or employee compensation. Corporate governance is partly about collecting metrics and determining how to promote actions that improve the company's reputation.

The 17 Sustainable Development Goals (SGDs) of the United Nations are also aimed at sustainable corporate management in addition to social and ecological factors. As a global system of goals, they provide a uniform language and a guide for the challenges of the 21st century. In order to master these goals, not only the commitment of politics and society but also that of business is required, and consequently it is up to each individual company.

These are the eight SDGs that feed into the social of ESG.

There is no "one size fits all" solution for the governance aspect in companies. Therefore, it is especially important to take time as a company and address the specific issues and needs of the company to tackle the governance issue. The work will have an immense impact on ESG compliance as a whole. Organizations with strong governance structures and performance are better able to understand, monitor and manage environmental and social issues that could impact corporate value. Poor governance practices, on the other hand, can have a significant impact on corporate reputation and investor confidence.

At cubemos , we have divided the governance area into three action areas:

  • Transparency, Finance & Taxes
  • Corporate Governance & Risk Management
  • Corporate ethics & whistleblower systems

Transparency, Finance & Taxes

Public reporting of a company's tax practices, its involvement in public policy development, such as lobbying and political donations, can increase transparency and enhance a company's trust and credibility. As part of this disclosure, companies should describe their approach to tax policy, financial support from/by governments, and data on political contributions. Furthermore, information on companies' payment practices to business partners is disclosed here.

The core contents of the "Transparency, Finance & Taxes" field of action

  • Finance & economic benefit
  • Taxes
  • Compliance
  • Political donations & lobbying
  • Payment practices

Examples of relevant key figures for the "Transparency, Finance & Taxes" field of action

  • Number of externally shared policies & guidelines
  • Total amount of membership fees paid to lobbying associations

Corporate Governance & Risk Management

A sound governance system ensures robust risk management and internal control processes. This is important to understand how a company's economic, environmental, and social impacts (e.g., human rights impacts) are integrated into its strategy and operations. This disclosure addresses the governance structure and composition of companies and includes policies on diversity and compensation issues related to governing bodies. In addition, information on risk management procedures, such as the monitoring of risks, and internal control procedures should be described.

The core contents of the "Corporate Governance & Risk Management" field of action

  • Management Structure, Composition & Compensation
  • Risk management & internal control processes

Examples of relevant key figures for the "Corporate Governance & Risk Management" field of action

  • Average ratio of female to male members of the Board of Management
  • Proportion of independent members of the Board of Management

Corporate ethics & whistleblower systems

Business ethics covers a wide range of topics that ensure transparent and sustainable business practices for the benefit of all stakeholders. Companies should describe their business conduct culture and measures to prevent corruption and anti-competitive behavior such as price fixing, quotas and monopoly practices. This may include, for example, anti-corruption training and the prevention and detection of anti-competitive behavior. In addition, companies should disclose their efforts to support whistleblowers, including the establishment of reporting channels and procedures to address adverse effects for whistleblowers.

The core contents of the "Business ethics & whistleblower systems" field of action

  • Whistleblower Systems
  • Anti-competitive behavior
  • Anti-Corruption & Anti-Bribery

Examples of relevant key figures for the field of action "Business ethics & whistleblowing systems

  • Number of anonymous reports of irregularities
  • Total number of incidents of corruption and bribery
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