ESG Governance Factors - Meaning, Examples & Improvement
What is the ‘G’ in ESG?
The ‘G’ in ESG stands for ‘governance’ considerations. Governance ESG criteria cover corporate policies, stakeholder rights and responsibilities, as well as how the corporation is managed and its success measured.
With such a high focus on climate risk and social factors, it is easy for the ‘G’ in ESG to be overlooked. However, poor governance can lead to dire consequences, such as the Facebook data scandal for example. Good governance is critical for building public faith and confidence in the business, as well as growing the share price.
See also:
What is the difference between ESG and corporate governance?
Corporate governance is a critical component of both ESG and GRC (governance, risk and compliance). The main difference between the governance aspect of ESG and GRC is that ESG is concerned with independent criteria of particular interest to investors, whereas GRC is concerned with the procedures and processes that ensure good governance.
ESG governance factors
The following are examples of important governance ESG factors for organizations to consider:
- Makeup of the Board
- Shareholder rights
- Corporate performance metrics
- Management structure
- Company policies and values
- Health and safety
- Information disclosure
- Auditing and corporate compliance
- Data security and cyber risk
Common ESG governance issues impacting companies
ESG governance factors may seem rather abstract but below average-ranking companies are particularly prone to mismanagement. Here are some examples.
1. Lack of diversity on Boards
S&P Global Market Intelligence research revealed that firms with more women on their boards of directors and in C-suite positions had greater financial performance than less diverse companies. By contrast, organizations where the Board is made up of 75% or more white males are at risk of falling behind both in terms of reputation and financial performance.
2. Unconsidered & inflated leadership compensation
US and UK regulators require publicly traded companies to allow shareholders to vote regularly on executive compensation packages, which are commonly a source of criticism in the media. And in fact, in the US, companies are now required to disclose the ratio of CEO-to-median employee pay annually. Companies with a careless approach to CEO compensation risk public scrutiny and criticism, as when Elon Musk publicly shamed Twitter for its compensation of board members and executives. In addition, companies could soon face penalties for paying their CEOs or other executives 50 times more than the median employee pay.
3. Conflicts of interest and poor executive judgment
The most obvious ESG governance risk to organizations is poor judgment on the part of the CEO and/or Board. An example of this is when CrossFit founder and former CEO, Greg Glassman, was pushed out of the company after he made incendiary comments about the death of George Floyd. Although he admitted to making “a mistake” with his words, Glassman later stepped down as CEO, as sponsors of the company’s flagship event began dropping out in response to his comments.
ESG governance best practices
1. Improve diversity on the Board & C-Suite
For enterprises today, it’s essential to demonstrate diversity in the Board of Directors. This is already happening, with white men, who held 60% of board seats in 2020, now only hold 23%. However, there are still companies in which white males make up 75% or more of the Board, and these organizations are being called out by the media.
Organizations must be careful not to be seen to be paying lip service to this important ESG governance factor, by – for example – improving diversity on the Board but remaining white male dominant within the C-suite. For example, about 60% of Board seats at both Accenture and Mastercard are held by non-white people. Yet, their executive leadership is comprised of only 17% and 30% non-white people respectively.
2. Implement corporate governance best practices
Because transparency and accountability are now such high-profile ESG governance issues, organizations need to take the necessary steps to ensure they’re beyond reproach. This should include:
- Adopting policies in line with law and applicable regulations
- Commitment to ethical values and behavior
- Defined roles and responsibilities
- Effective board reporting
- Documented Board meetings
- Director training and board evaluations
- Subsidiary governance structures or policies
- Documenting governance practices and procedures
3. Transparent ESG governance reporting
Time and time again, we’re reminded of how critical transparency is now in reporting, especially in relation to ESG governance. Vague information, unsubstantiated claims, and vanity ESG metrics are no longer tolerated by stakeholders.
In September 2020, the World Economic Forum and its International Business Council (IBC) published a consolidated set of standards, which organizations can now follow.