Power Bite: Why Good Governance is Key to ESG

Before diving into this topic, it is important to distinguish between ESG and sustainability. Sustainability is a goal, such as achieving a sustainable world, sustainable societies, or a sustainable economy. ESG on the other hand, is the framework used to achieve that goal. It is a set of tools that helps companies to measure how well they’re doing based on specific benchmarks. To utilize this framework effectively, good governance is key.

Characteristics of Good Governance

In order to ensure that your organization has good governance, leadership needs to be fully committed that the company’s actions are discerned through the lens of sustainability. This encompasses how the company’s management shepherds the company’s values, and how they protect the interest of all their stakeholders, including employees, shareholders, suppliers, customers, and the wider community.

For example, it is important that a company respects labor rights, pays a fair wage, and ensures that employees have a work-life balance. A company should also be investing into their employees by providing training and education.

When it comes to the shareholders, one needs to look beyond the return on investment. Are the projects your shareholders are investing in sustainable? When it comes to customers, the concern would be with the sustainability of the product itself. Is the product they are buying recyclable? When it comes to suppliers, one needs to ensure that they are treated fairly, and that they too are respecting labor and human rights. All of these factors should be looked at through the lens of the ESG framework.

The actual organization structure should be adapted to each company’s needs. For example, small and medium-sized enterprises should have a different governance structure from a multinational corporation. However, what all companies should have in common regardless of size, is an environment of transparency and openness This is ensured through accountability to stakeholders and shareholders. This will also influence the reputation of the company, which in turn can either positively or negatively impact investment and business in general.

Risks to Look Out For

As noble as one’s intentions can be, there are still risks that come with ESG. A notable example would be how Deutsche Bank was accused of the dreaded term: greenwashing. A Chief Sustainability Officer reported that the company had made misleading statements in a 2020 annual report, and had falsely advertised themselves to seem more environmentally friendly than they actually were. They had claimed to fulfill ESG criteria in various areas where they did not. This severely damaged the reputation of the company. Hence, it is important to get the governance element of ESG right, and invest in a strong, trustworthy leadership guided by an ESG compliant moral compass. While it can be tempting to make bad decisions for short-term profit, the risks far outweigh the rewards.

Good governance can help to protect the environment, and create socially just communities and workplaces. Hence, governance should be a key focus for any company’s ESG strategy.