Johanna Tahtinen of the World Business Council for Sustainable Development explains how boards can improve governance systems to meaningfully integrate ESG
Today, information on a company’s environmental, social and governance (ESG) practices isn’t just a “nice to have,” it’s a “need to have”.
In a report published in 2017, the consulting firm McKinsey & Company found that over a quarter of assets under management globally are invested considering ESG factors, and what was “once a niche practice, has become a large and fast-growing major market segment.”
Increasing numbers of institutional investors understand that ESG issues pose clear risks related to everything from reputation to supply chain, business model innovation and license to operate. As environmental risks dominate the World Economic Forum’s (WEF) Global Risks Report for the third year in a row, ESG is clearly becoming part of the everyday business reality as well as a fiduciary duty.
Governance metrics are a starting point and a focus area for many investors
This creates expectations for companies to integrate ESG meaningfully into their governance structures, management processes and disclosure. But many boards are still lagging behind, which creates blind spots for the company. To address this, the World Business Council for Sustainable Development (WBCSD) recently launched a project on governance and internal oversight to elevate ESG-related issues to the boardroom by supporting stronger decision-making, risk management and business resilience. By managing and mitigating ESG risks and opportunities, boards can make better decisions aligned with their fiduciary duties while making the business more successful over the long-term.
Good governance also sends strong signals to the market. A recent study by WBCSD and PwC shows that if a company demonstrates strong governance through policy and process disclosures, “investors generally have more confidence in the information reported” and that “governance metrics are a starting point and a focus area for many investors.”
The increasing importance of ESG now means that there’s more scrutiny placed on the quality and comparability of companies’ external disclosures, including what's reported on governance. Because of this, there’s now a more a rigorous analysis of the current standards, tools and requirements that are available for organisations looking to report ESG information.
Unfortunately, this has created a landscape around corporate reporting that is unintentionally confused and fragmented.
Recent research looking at 52 countries across the world, Insights from the Reporting Exchange: Corporate Governance and Harmonisation, shows clear areas of alignment between countries, from the subject matter to the principles covered under corporate governance.
The research shows that over 80% of the corporate governance codes analysed cover risk management, internal control, corporate leadership and dialogue with shareholders. There’s also alignment and consistency between specific international codes and the 52 national codes analysed. For instance, the G20/OECD Corporate Governance Principles and the ICGN’s Global Governance Principles are two of the major contributors, as the principles of most of the codes in analysis reflect these international provisions.
By progressing the reporting agenda and supporting effective reporting, companies will have better-quality data to inform their decisions
Much of this alignment was influenced by the ground-breaking UK Corporate Governance Code, which was designed for universal application and with support from international organisations such as the OECD and G20. The alignments show a broad but shared set of corporate governance principles that provide us with an example of how to move towards greater coherence in corporate reporting, especially when it comes to ESG.
Governance codes show how reporting practices and requirements from across the world can influence and shape the landscape to create a harmonised system. By progressing the reporting agenda and supporting effective reporting, companies will have better-quality data to inform their decisions and help communicate their value-add to stakeholders.
Moving forward, companies can take the following steps to improve their governance systems to create long-term business value, competitiveness and overall value to the society:
Integrate material ESG information into reporting processes and decision-making. This will help business send the right signals to the market, helping shift ESG to the business realm so that they’re not considered “sustainability” issues, but business issues as well.
Use consistent and comparable standards and metrics. More comprehensive, consistent and comparable sustainable standards and disclosure will fulfill the wishes of investors and boards around the world to strengthen decision-making and create value over the long term.
Make sure your board understands the importance of ESG. Strengthening knowledge and understanding around risks and opportunities related to ESG on board-level. This could be done through training, guidance and incentives and would also support boards in fulfilling their fiduciary duty.
All of the above need efforts from business, investors and the society and will help accelerate the allocation of capital to more sustainable businesses and outcomes.
Johanna Tahtinen is associate of redefining value at the World Business Council for Sustainable Development.