Why we should talk more about the G in ESG

ESG is currently one of the hottest topics in the business landscape. The discussion about ESG mostly tends to focus on the E of ESG. Tackling environmental issues, combating climate change and promoting sustainability are front of mind for many businesses – rightly so. In addition, we are talking more about the S of ESG. This entails social matters that include human rights, labour relations, diversity and inclusion, and health and safety standards.

Interestingly, we do not often talk about the G of ESG. This G includes various governance matters, such as the oversight, diversity and independence of leadership, sound decision-making, checks and balances, stakeholder engagement, responsible business conduct (‘tone from the top’), risk and control management and tax transparency.

There is a reason why we do not discuss the G as often as the environmental and social aspects of ESG. Unlike those environmental and social aspects, the governance aspect is a means to an end rather than an end in itself. There is no societal benefit in achieving a certain standard of governance, other than that governance being an effective tool for achieving other benefits – be they environmental, social or purely financial objectives.

The true value of the G
Sound governance is an essential precondition for achieving any objective, especially in the field of ESG. Governance is driving the changing approach by businesses towards focusing on ESG issues. Historically, these matters were generally dealt with from the perspective of compliance. Companies were aiming to meet mandatory legal standards, but they did not see themselves as having a social responsibility that went beyond that. As time progressed, this approach gradually changed, in the sense that businesses identified business risks and benefits resulting from ESG matters independently of the applicable legal standards. People realised that there was value in complying with voluntary ESG standards – even beyond the minimum legal requirements.

A relatively new phenomenon is the desire to make societal interests part of the core principles of a business. This is done by embedding these interests in a company’s purpose and, consequently, its entire organisation. As a result, any harmful effects of business activities are shifting from a burden on society collectively to an individual responsibility of the company. The aim of this approach is that companies will embed strong ESG principles in their corporate culture. Behavioral change, including in the field of ESG, will increasingly be achieved through a positive change in corporate culture, which in turn is influenced by a focus on purpose. That is the true value of the G.

Over de auteur(s)

Samuel Garcia Nelen | Senior Associate Allen & Overy