The nature of business has evolved and corporate considerations are not what they once were. Gone are the days of profitability and outsized returns at all costs. The world is currently facing many urgent challenges, from climate change to environmental degradation, and social inequality. These challenges are putting a significant strain on organisations, and governments alike. A study by the World Economic Forum found that 85% of CEOs believe that environmental risks will have a significant impact on their businesses in the next five years.
In response to these challenges, there is a growing movement towards sustainable corporate governance practices by adopting Environmental, Social, and Governance (ESG) considerations. ESG is a strategy to manage the environmental, social, and governance (ESG) impact that an organisation makes across its operations.
Understanding ESG: A Foundation of Sustainable Corporate Governance
ESG represents a paradigm shift in how organisations operate and interact with the world. It’s a holistic framework that evaluates an organisation’s performance across three key areas:
- Environmental (E): This dimension focuses on an organisation’s ecological footprint. It assesses its commitment to environmental sustainability, including practices related to climate change, resource management, and waste reduction. You see, organisations that embrace environmental responsibility are more likely to adopt eco-friendly practices, reduce carbon emissions, and promote biodiversity. For instance, Apple has committed to making all of its products carbon-neutral by 2030. This is to tell you that there is a growing awareness of how climate change and other environmental challenges can affect both the organisation and society’s existence.
- Social (S): The social aspect of ESG concentrates on an organisation’s interactions with its stakeholders, including employees, customers, communities, and society at large. It encompasses diversity and inclusion, labour practices, human rights, and community engagement.
Organisations that prioritise social responsibility tend to have better relationships with employees, enhanced customer loyalty, and a positive societal impact. In lieu, McKinsey Global Institute found that companies that are committed to sustainability outperform their peers by 15% in terms of revenue growth and 12% in terms of profitability.
3. Governance (G): Governance refers to an organisation’s internal management and decision-making processes. It evaluates factors like board composition, executive compensation, shareholder rights, and ethical behaviour. Strong governance ensures transparency, accountability, and ethical conduct within an organisation.
Why ESG Matters in Corporate Governance
ESG is becoming increasingly important for corporate governance. This is because ESG factors can have a significant impact on an organisation’s long-term corporate performance and sustainability. For example, if you run an organisation with a poor environmental record, you may face increased regulatory scrutiny and higher costs.
If your organisation has a poor social record, you could suffer irreparable reputational damage, losing customers, employees, brand equity and market share.
It is critical to note that ESG is no more a mere buzz or trending word; it represents a profound transformation in how businesses and organisations approach their societal responsibilities. ESG considerations are steadily gaining significance within the corporate landscape (even across Africa), driven by several compelling factors. This momentum is, in part, due to influential stakeholders (investors, consumers, and regulators) demanding its integration into corporate practices.
With more and more stakeholders demanding it, how can you effectively integrate ESG into your corporate governance strategies for your organisation to achieve sustainable success?
Integrating ESG into Corporate Governance
1. Set ESG goals and targets: What are your organisation’s specific goals for reducing its environmental impact, improving its social performance, and strengthening its governance practices? Those goals should be measurable, ambitious, and time-bound. For example, Netflix has committed to investing $100 Million in environmental projects over the next five years. When you have goals like this, it allows you to track and demonstrate your social responsibility to your stakeholders.
2. Integrate ESG into risk management: ESG risks can have a significant impact on an organisation’s performance. That’s why your organisation needs to establish structures and parameters that will help identify and manage these risks through an ESG risk management framework.
For example, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) requires financial institutions to disclose their ESG risks and impacts. This means that corporate board executives and directors need to be aware of the ESG implications of their activities to comply with regulations.
3. Disclose ESG performance: As an organisation, you need to disclose your ESG performance to your stakeholders. This transparency will help to build trust and confidence with your stakeholders.
In recent times, Microsoft has been a strong advocate for ESG disclosure. This is why the company publishes an annual ESG report that is aligned with the Sustainability Accounting Standards Board (SASB) standards. Microsoft’s ESG disclosure has helped the entity reduce its environmental impact and improve its social performance.
4. Adopt a Long-term View: ESG-focused organisations are more likely to thrive in the long run i.e. sustainability. By focusing on the impact of your organisation’s actions, you position yourself as a responsible and forward-thinking entity capable of adapting to changing market dynamics.
5. Adapt for Regulatory Compliance: Governments and regulatory bodies are placing increasing emphasis on ESG disclosure and compliance. Companies that align with ESG principles are more likely to navigate these regulatory changes effectively, as they would already be reporting on the ESG information that regulators require. Additionally, ESG-aligned companies are more likely to have robust sustainability practices in place, which can help them mitigate their ESG risks and comply with regulations. A close example is the United Kingdom’s Sustainability Disclosure Requirements (SDR), which will require all UK-listed companies and large asset managers to disclose ESG information from 2023 onwards.
6. Ensure Accountability Across Board: Management should be held accountable for the company’s ESG performance. This accountability should also be reflected in their compensation and performance reviews.
For instance, In 2019, Nestlé announced that it would be linking executive compensation to the company’s ESG performance. The results of this initiative have been positive, with Nestlé being ranked as one of the most sustainable companies in the world by the Dow Jones Sustainability Index in 2021.
7. Enhancing reputation: A positive ESG reputation can be a valuable asset. It attracts investors, customers, and talented employees who are increasingly looking for companies committed to ethical practices and sustainability.
For instance, Nike has committed to paying all its workers a living wage by 2025. This will prove to be a great reason for them to retain and attract top talents.
By following these steps, your organisation can effectively integrate ESG into their corporate governance practices. This would in turn enhance your long-term strategic processes for sustainable success.