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
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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.
Sharing Our Perspectives
Our practitioners share their insights and perspectives on the trends and challenges shaping the market.
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How Does ESG Address Environmental Concerns?
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When investors consider where to put their money, they may examine environmental, social and governance (ESG) criteria, learn about a company’s core values and decide if they align with their own. Young people, in particular, search out this information to make decisions that align with their morals.
What Is Environmental, Social and Corporate Governance?
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NJDEP Implements New Jersey Environmental Justice Law Through Administrative Order
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TRC Announces Collaboration with Greenstone Reinforcing Integrated ESG, Sustainability and Climate Risk Solutions
June 26, 2020
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