The days of businesses thinking exclusively in terms of revenue are over. Now more than ever, companies need to be aware of their environmental, societal, and governmental impact.
After all, it doesn’t take a corporate management expert to know that ESG compliance has been picking up steam in recent years. Companies are aware of how much governments and communities value dedication to environmental protection, human rights, and social movements, which make up some of the tenets of ESG.
But out of all three letters in the acronym, the “G” is often overlooked in the corporate discourse. This trend is incredibly unfortunate, as the “G” component is necessary in order to support the “E” and “S.” Plus, it’s practically mandatory for building up long-term, sustainable value.
Not only that, but failures in “G” have resulted in mismanagement scandals that have had dire consequences for the businesses involved. It’s a serious matter that deserves the attention of the board of directors, not just a mere checkbox to casually fill in.
The Key Elements of ESG
First off, let’s clear up the terms. ESG stands for environmental, social, and corporate governance. It’s the approach an organization takes to build up its reputation and value outside of maximizing profits and appealing to shareholders.
“Environmental” covers the conservation of natural wildlife and ecosystems. Companies are responsible for their impact on the planet, from carbon emissions to pollution, energy efficiency, and waste management.
“Social” is the effect on people and society. Customer protection, data privacy, treatment of employees and staff, and human rights all go under this category.
“Governance” involves how the business is administered. How does the board conduct its operations? Are there auditing procedures and protections against bribery and corruption? How does the organization participate in political initiatives?
The importance of ESG cannot be understated. In fact, a focus on environmental, social, and corporate governance has benefits not only for the business in question but also:
- The customers: Buyers more often buy from companies that show dedication to environmental or social causes. 71% of them are more likely to choose and recommend a brand that aligns with their own personal values. Whether they know it or not, customers today are weighing ESG factors in their heads when they go shopping.
- The shareholders: Commitment to ESG results in future returns for the company and long-term value creation, hence why corporate performance reports always contain ESG ratings.
- The supply chain: A company that not only holds true to ESG but also expects those same values in its vendors and partners is more likely to practice ethical behavior when working with suppliers. Supply chains benefit when the entities involved work under sustainable policies.
- Government regulators: Government agencies hold tight control over businesses they believe to be a threat to the environment or society as a whole. ESG is ultimately a form of corporate risk management.
- The community: Smart management teams know that ESG activities like sponsoring local events and providing employment opportunities to the local community are excellent for public relations.
But the question now remains: why does the “governance” portion of ESG often go overlooked when it’s so vital to the strategy as a whole?
What Is the G in ESG?
A business, no matter its size or industry, has plenty of stakeholders to serve:
- Investors and shareholders
- Upper management and executives
- Customers and the community
- Employees and staff
- Suppliers and business partners
- Financial lenders
- Government agencies
Governance in ESG, which involves all the politics and practices used to manage a company, is all about balancing business decisions to serve all these groups equally. To achieve that goal, governance-focused managers focus on accountability, transparency, and corporate responsibility.
While the board of directors is mainly involved in crafting company policy and thus is ultimately responsible for overseeing governance, managers at every level contribute to overall ESG compliance in the end.
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Why Does Governance Matter So Much?
There are many ways to answer this question. A strong dedication to positive governance improves the reputation of the brand as a whole and leads to greater employee commitment and customer loyalty.
Investors Care About It
Investors themselves draw a strong correlation between ESG performance and corporate risk management. Governance specifically ensures that a brand’s business practices are ethical, transparent, and accountable.
Investors know that long-term value comes to the businesses that dedicate to ESG matters and will look away from investments with an excessive amount of risk in that regard.
It’s Heavily Connected with Other Parts of ESG
Contrary to what the acronym might suggest, the individual components of ESG are starting to blur together. Governance has a significant impact on corporate social responsibility, as more transparent and ethical executives and board members lead to a better grasp on social issues related to the brand.
Likewise, governance is starting to encroach upon environmental efforts as well. How a company makes business decisions with climate change legislation in mind, for instance, directly correlates with its environmental impact.
A consequence here is how ESG compliance reporting will evolve in the coming years. Environmental and social responsibilities can be measured and quantified in many ways, and governance is partly about collecting metrics and determining how to boost policies that increase the company’s reputation. The result is that “E” and “S” will soon become an inherent part of “G.”
Tips and Tricks For Achieving Positive Governance
Just by taking a look at a lot of the recent high-profile governance failures, we can see where businesses can improve regarding this essential component of ESG compliance. A few tips and pitfalls to look out for include:
- Makeup of the board of directors: You want as many different perspectives in the boardroom as possible for good governance posturing. The more people you have, the more informed your decisions are and the better you can respond to the needs of customers, investors, employees, and the community around you.
- Too many cooks in the kitchen: At the same time, you don’t want too many upper executives or board members. Avoid conflicts of interest whenever possible and make sure all stakeholders have their own equal representation in the boardroom.
- Legal compliance: Governance directly addresses how a business adheres to government regulations. A positive approach to governance requires that the company discloses its operations transparently and allows for auditing to keep itself accountable. Poor compliance in general can lead to financial losses due to fines and penalties, as well as hits to public reputation once the news gets out.
- Approach to corporate policy: Is your brand acting ethically in the initiatives it pursues and the policies it creates? While pleasing its stakeholders, is it leaving out anybody important? Make sure, for instance, that your revenue responsibilities don’t intrude upon your environmental responsibilities.
- Executive compensation: Most people are suspicious of businesses where upper management is paid exceptionally more than the rest of the company, especially if the quality of the governance is known to be poor.
There’s no “one size fits all” solution to governance problems. Take the time to address your company’s unique problems and needs in order to tackle the issue of positive governance. The work you’re doing will have an immense impact on ESG compliance as a whole.
How Centraleyes Helps Companies Move Forward with ESG
We know that ESG risk management plays a significant role in the success and productivity of a business. It goes beyond the financial factors and looks at how sustainable long-term growth is. That’s why governance is playing an increasingly larger role not only within ESG but also in the general business landscape for years to come.
In addition to your own ESG compliance, have you ever wondered about the quality of governance for the brands you partner with? If you expect more from your business connections, start measuring their ESG values with Centraleyes, an automated cyber risk management platform with a dedication to governance needs.
Start Getting Value With
Centraleyes for Free
See for yourself how the Centraleyes platform exceeds anything an old GRC
system does and eliminates the need for manual processes and spreadsheets
to give you immediate value and run a full risk assessment in less than 30 days