The keystone of ESG...Governance
Within the next 5 years all investors will measure a company's impact on society, government, and the environment to determine its worth... Larry Fink, CEO Blackrock, 2018
As we have evolved from the broad term sustainability into a more descriptive term, ESG (Environment, Social, & Governance), I sometimes wonder if we might have gotten the order of those initials wrong. It is true, in combination, a strong ESG proposition can help create enormous business value. Certainly, we can see the impact of “E.” Impacts on the environmental issues hit both our bottom line in operational cost reductions as well as reduce our impact on the climate and the communities in which they sit. The “S,” social is certainly important as we think about our impact on people, our employees, our customers, and the residents of those same communities. There are numerous seminars, webinars, consultants, and businesses built around reducing the “E,” and a growing number also focused on addressing the “S,” but what sometimes gets lost is the importance of the “G” governance.
The “G” is what makes the “E” and “S” possible and covers a broad range of corporate-level policies, procedures, and practices that impact standards, disclosure, auditing, and compliance. From an investor standpoint, the G promotes confidence in the organization; it provides evidence that the accounting is accurate and the business practices are ethical. From a risk standpoint, this is where we verify that the organization is considering and mitigating its risks while taking advantage of its opportunities.
According to S&P Global, “companies that rank well below average on good governance characteristics are particularly prone to mismanagement and risk their ability to capitalize on business opportunities over time” (source). This is where the rubber meets the road. Is leadership walking the talk? Is executive leadership compensation tied to both financial and ESG performance? Does the board have oversight into the ESG program? What basic internal controls are present to provide oversight?
Governance can be seen as the link between corporate culture and the framework that defines business relationships between management teams, internal stakeholders, external stakeholders, clients, and customers alike. It is the system that guides our actions.
So again, I ask, is the “G” really the least significant part of ESG, or perhaps, is it really the keystone of the organization that holds together the E and the S. The piece that locks everything else into position and allows the organization to flourish? Perhaps it really should be GES or GSE?
Taking a closer look at corporate governance, there are a few areas that it should encompass:
The explicit and implicit contracts between an organization and the stakeholders including defining and distributing responsibilities, rights, and rewards.
The procedures for reconciling the occasional conflicting interests of stakeholders, taking into account their duties, privileges, and roles.
The procedures for proper supervision, control, and information-flows which serve as a system of checks and balances.
The mechanism in which the organization ensures compliance with regulations and operates lawfully.
Assurity to stakeholders of ethical and accurate accounting procedures as well as appropriate transparency.
The establishment of procedures that identify potential risks and opportunities and appropriate controls to mitigate said risks when identified.
Failure to establish proper governance can have many repercussions, including civil or even criminal prosecution in extreme cases. It is not difficult to find examples from the collapse of Enron to Volkswagon, corporate governance matters.
I get it; policies and procedures are not going to make you a superhero. Your marketing department is likely not itching to develop whitepapers demonstrating the financial return of good corporate governance. But what it will do is keep you out of trouble, and just as important, it will set the stage for success in the areas of “E” and “S.”
It is truly the Keystone of the Arch; without it, the entire structure crumbles.
You can help reduce the impact of the built environment by sharing this blog with your peers. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry reduce energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. To get there, we must build relationships within our organizations and outside of our organizations building the critical mass needed to truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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