ESG (Environmental, Social, and Governance) is now commonplace for examining and disclosing an organization’s sustainability and social impact. However, the “G” in ESG – information relating to how an organization is governed – is often overlooked in ESG reporting. In this article, we explore the “G” in ESG and outline why it is fundamental to all other aspects of the organization’s sustainability.
What does ‘governance’ refer to and why is it important?
Governance refers to an organization’s internal policies and practices, leadership structure, compliance, and overall decision-making processes. The purpose of the corporation, the role and makeup of boards of directors, and the compensation and oversight of top executives have emerged as core issues in companies’ corporate governance structures.
Good governance is essential for long-term success. When an organization has strong governance, it is more likely to make sound decisions, maintain the trust of its stakeholders, and create value. On the other hand, organizations with weak governance are more likely to face financial losses, reputational damage, and regulatory violations.
Regulators, investors, customers and employees are increasingly interested in organizations with strong ESG values and practices, including good governance, transparency and accountability, and appropriate risk management. Studies have shown that companies with strong ESG performance outperform their peers. So, organizations will see tremendous benefits if they prioritize good governance as part of a strong ESG strategy.
Three drivers for good governance:
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Risk Management
One crucial element of good governance is risk management. Organizations need to have a procedure in place to identify, assess, and manage risk. This process will include risks related to the environment, social responsibility, and regulatory compliance. Proactively addressing these risks will reduce the likelihood and impact of threats while increasing the ability to take advantage of opportunities.
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Building Trust and Credibility
Organizations that are transparent about their operations, financials, and decision-making processes are more likely to earn the trust of stakeholders, including investors, customers, and employees. Transparency also helps prevent corruption and unethical behavior by making it easier to detect and report. A strong culture of good governance backed by appropriate tools and championed by all leaders is essential to providing this transparency.
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Compliance
Finally, good governance requires ethical behavior and compliance with relevant laws and regulations. Organizations prioritizing profits over ethics are more likely to engage in illegal or unethical practices that harm stakeholders and damage the company’s reputation. Organizations must have clear policies and procedures to ensure compliance with laws and regulations and hold board members and the executive team accountable for ethical behavior.
How to Achieve Good Governance
Achieving good governance requires a firm commitment from the board and leadership team, but it also needs the right tools to become embedded and implemented. Tools which improve the efficiency of meetings, capture decisions and actions, provide simple overviews of progress towards goals and compliance, and simplify and promote the practice of risk management.
Increasingly organizations are investing in specialist software to support their governance framework replacing the complex spreadsheets, file stores, email chains, and other inefficient and ineffective tools they previously used.
Summary
In conclusion, the “G” in ESG is crucial when evaluating an organization’s impact on the world. Good governance is vital for an organization’s long-term success and includes risk management, decision-making, transparency, compliance, and ethical behavior. Organizations with strong governance practices promote sustainable, compliant, and ethical business practices while benefiting from increased value and positive financial returns.
This guest article was written by Decision Time, an all-in-one cloud software for managing meetings, risks, objectives, and compliance.
Resources
https://www.bsr.org/en/blog/how-to-build-effective-sustainability-governance-structures
https://www.thecorporategovernanceinstitute.com/insights/guides/what-is-sustainability
