ESG (Environmental, Social, and Governance) issues have accelerated into the corporate world since the concept was first coined in 2006. This rapid rise stems from a more socially conscious consumer base and has been accelerated further by pledges from governments looking to guide businesses towards a more environmentally friendly future. Businesses need to find a way to satisfy these demands to create sustainable, long-term value not only for shareholders but for all stakeholders.
This interest in how businesses satisfy ESG concerns on behalf of stakeholders (customers, suppliers, employees, investors, regulators and wider society) has been born out of a demand for more transparency into how organisations impact people and the environment, and a need to ensure sustainability and fair practices.
But if we scratch the surface of this valued criteria, the one factor appears to get side-lined at the expense of its contemporaries is ’Governance’. Whilst environmental factors are often the areas where a business can demonstrate cost savings on energy resources & waste, and social responsibility is essential to keep businesses out of the headlines, it is careless of businesses to overlook the required ‘Governance’, which maps out the rules and processes that form the cornerstone of their ability to achieve environmental and social goals.
To emphasise the importance of establishing a robust ESG strategy that creates sustainable, long-term value for all stakeholders, we have created a series of blogs that explores each of the three elements. In this third instalment, we focus on the importance of satisfying the governance element. Governance is essentially the rules, policies and procedures that a business operates by, and without rules you have chaos!
G is for Governance
Governance has been marginalised due to a common misconception: that it is simply a list of rules from senior executives that don’t always take into account the day to day demands of the running of the business. This leaves staff questioning its value.
The view from the top isn’t much clearer, with those erroneously considered to be the sole custodians of governance losing sight of its significance. Rather than underpinning environmental and social responsibilities with good governance, it is often side-lined by impatient executives who want to skip straight to achieving these goals without laying the foundations for success. What they fail to realise is good governance will drive a business in the right direction with a structured approach that links corporate strategy and goals to the rules, policies and procedures that staff live and breathe every day. Governance should be the framework to ensure your business is striving to meet its strategic objectives.
ESG risks and opportunities can only be mitigated or exploited by taking them seriously, and that’s where governance plays a pivotal role. Governance is in essence a framework to set rules and procedures for the business to follow and if rules aren’t clearly defined, how will you know when they have been broken? Without these pre-defined tolerances and processes, business leaders can become rogue and expose the business to significant risk.
Corporate governance is concerned with the internal procedures and controls an organisation adopts to govern itself. Its purpose is to help organisations make effective decisions, comply with the law, operate in alignment with its stated values and meet the needs of external stakeholders – this encompasses security and resiliency and avoids favourable treatment and conflicts of interest.
Without this structure, your business will lack the ability to focus on the objectives and challenges it faces. It will struggle to build trust in the business community and influence behaviour towards environmental and social factors. Businesses must adapt to align their corporate strategy with the rules, policies, procedures and values that governance is comprised of.
While corporate governance failures don’t happen overnight, if your business deprives itself of these pre-defined tolerances and processes it will be exposed to significant financial and reputational risks over time. Examples of poor corporate governance include:
- Volkswagen – In 2015, a report released by the EPA (Environmental Protection Agency) exposed that many models of Volkswagen cars, which were being sold in the US, had a ‘defeat device’ installed which could detect when they were being tested – changing a car’s performance to improve its emissions results. Following the release of the EPA report – which expressed that the organisation was missing “functioning corporate governance” – the German car giant admitted to cheating on its emissions tests in the US. Volkswagen was forced to pay an $18 billion fine from the EPA, causing its share value to drop by 30 per cent and wiping out over $26 billion in shareholder value.
- Wells Fargo – In 2016, the American multinational financial services company had to dismiss more than 5,300 employees after it emerged that fake bank accounts had been created to meet sales targets. Around 2,000 fake accounts were identified, including fictitious PINs and email addresses. Client funds were transferred from their accounts into fake ones, with some people charged fees for having insufficient funds in their original account. Federal and state regulators fined the bank $185 million in total and CEO John Stumpf retired under a cloud of controversy.
Rather than shoving it to the bottom of the corporate agenda, your business must strive to achieve good governance. It gives boards and executives control and guidance over business operations and provides assurance that you have procedures and policies in place to address potential issues. It also demonstrates that you possess the agility to easily pivot the business and make improvements and indicates a sustainable approach to business operations.
Good governance has four key components:
- Transparency: Clearly defining your structure, operations and performance and communicating this with relevant stakeholders.
- Accountability: Achieving informed decision-making by implementing processes that enable the right people to make the right decisions.
- Stewardship: Establishing a holistic view that your business is managed for the benefit of its stakeholders – not just its shareholders.
- Integrity: Fostering a culture committed to ethical behaviour and regulatory compliance.
Good governance that’s aligned with ESG metrics empowers your workforce – and ultimately your business – to operate in an environmentally and socially responsible manner and paves the way to business success. It provides a framework to ensure everyone is working towards the goals set by the board and enables business leaders to get visibility into what is on track and what needs addressing. It provides a conduit for executives to communicate to the entire business and set tolerances for undesired behaviour.
Governance serves to protect your business and reduce risk. Empowered by this, you can guarantee that all decisions are made in line with the corporate strategy and all procedures dovetail with it – so the entire organisation can work in unison to achieve strategic goals.
A governance framework associated with ESG metrics is essential as it is ultimately the staff and management team who can actively ensure you are operating in an environmentally friendly manner and reducing your carbon footprint. It is your policies and procedures that will ensure staff are treated fairly and acting in a socially responsible way.
GRC software can help you link your ESG strategy, policies and procedures through a governance framework and enable you to track ESG metrics and set controls and tolerances.
Governance, risk and compliance (GRC) software like Camms with built in ESG capabilities, already has governance at its core. It can be harnessed to break down your ESG strategy into actionable tasks with timelines, budgets and metrics that are allocated ownership across the business. This innate transparency provides the board with full visibility into the progress of each ESG objective and enables them to understand the potential risks. Policies and procedures are governed by utilising GRC software, ensuring employees are operating in line with requirements and any problems or tolerances can be flagged via a control framework.
In addition the ESG capabilities within the Camms solution enables your organisation to access regulatory content broken down into easily digestible language, enabling you to set up work flows to implement regulatory changes, linked to stakeholders, policies and procedures.
API’s enable you to easily pull ESG data from other systems and sources into the Camms solution to facilitate seamless interaction and data collection from critical sources across your business including staff, financials, projects, incidents, risks, and measures. This consolidated data provides a complete picture of your ESG credentials via dashboards and reporting.
Access your ESG data in one place and achieve demonstrable proof of a robust ESG programme, request a demo of the Camms solution.
Read the other ESG Blogs in this Series
Part 1 – Putting the E into ESG with ISO 14001
Adopting ISO 14001 demonstrates your commitment to ESG & will guide you towards a sustainable operating model. Read more in our blog.
Part 2 – Tackling the social Aspect of ESG
The social aspect of ESG can be notoriously difficult to track but it is often the area that sees companies hit the headlines. Find out how you can create a fair, ethical culture that operates in a socially responsible way in our blog.