How Does ESG Address Corporate Governance?
Environmental, social and governance (ESG) criteria can direct investors’ decisions regarding which companies they choose to support. Each component plays a crucial role in risk assessment. Investors always want to reduce their risks, and examining businesses’ practices in these areas can help determine whether they are worth supporting. Many investors also want to support companies whose values align with their own.
Governance is the third facet of ESG, and it’s often the most misunderstood as its impact can be less evident than environmental and social factors. Governance refers to the decision-making of companies, and it may encompass:
- Company leadership tactics
- Pay for executives
- Internal controls put in place for accounting
- Stakeholder involvement
Understanding Governance in ESG
While investors focus on environmental and social factors to gauge whether a company is a good fit for their value-based decisions, governance can be a determining factor.. Poor decisions related to corporate governance have the potential todevalue a company. Most big scandals in corporate America occur because of bad governance, such as Enron’s deceptive accounting practices. Failure to evolve is also tied to governance. It includes how companies respond to adversity, and some lack structures to deal with such consequences.
Governance remains such a nuanced area that some companies may not meet all the measured criteria. That is expected, but they should meet basic ones, such as avoiding illegal practices. Conflicts of interest in choosing board members can also be navigated easily. Risk mitigation is always an important practice in business, and using a common-sense approach can result in effective governance.
Why ESG Matters to Your Corporate Strategy
Companies that rank low in governance ratings assume more risk. When problems occur, systems are not in place to deal with them effectively. For instance, if accounting practices are not accurate and transparent, it creates a host of problems that a company may not know how to address. If shareholder rights are vague, what happens when stakeholders assert influence?
Your corporate strategy will strengthen if you pay attention to governance and the other aspects of ESG. Leadership accountability limits conflicts of interest that can damage a company. Companies must have primary oversight of CEOs and other executives. Otherwise, they can indulge in behavior that puts their personal interests ahead of the company’s rather than the company’s. A corporation with proper governance can fully thrive. Whether a company values profits or stakeholder benefits, it should adhere to good governance to reduce risk.
Finding an ESG Consultant
Do you need an ESG consultant to assist with your corporate policy? TRC provides risk assessment for ESG and corporate convergence as well as the other criteria. Our ESG consultants look at the big picture to inform you of your risk and help you address areas where you fall short. Our team members have gained experience in the field and offer responsive assistance. Learn more about us and contact us today.
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