If we are to give in to the popularity and idealism of policy
makers and environmentalists, it would seem that we have an answer
to the ESG paradox that has plagued the investment world for about
two decades and triggered so many debates as to whether for-profit
organizations can really aid in preserving the environment and
encourage sustainable and ethical investment behaviour.

At the time of typing this, Google returns 508,000,000 results
on the term; a hot topic by any standard. So, what is ESG after
all? “ESG” is a concept or rather a set of standards
purporting to balance financial outcomes against the impact
business has on society, the environment and corporate governance.
Nowadays, strong ESG scores act as a corporate badge of honour as
they (appear) to attest to an organization’s (a) environmental
footprint and response to climate change, such as on reduction of
carbon emissions and waste production; (b) relationship and
responsibility towards people, society, and human values in
general; and (c) a sustainable, transparent, and responsible
decision-making structure within the business. Out of these, it
would seem that “E” and “S” could live without
the “G”, however, as discussed further below, the truth
is that both of them are contingent upon the existence of the
latter in the equation.

Though originally driven by good intentions in improving the
world around us, the hard truth is that, currently, ESG does not,
and (potentially) will not, resolve the generational challenges
faced by society. The trillions of US Dollars invested aim to
generate profit to the people that have allocated and risk to lose
them (whether institutional or retail investors) rather than having
been consciously dedicated to save or improve our society and the
world. To quote an international news outlet take on the situation,
ESG ratings measure the potential impact of the world on an
organization and its shareholders rather than the impact an
organization has on the world. In support of this, research data
suggests a tendency towards misleading and, arguably, deceptive
“greenwashing” tactics by organizations, whose aim is to
highlight a shift towards an ethical and environmentally conscious
friendly business policy. Others have leveraged on the opportunity
and found new ways of generating income and/or maximising profit
– take for example the creation of new investment strategies
and products targeting a new group of investors, along with the
associated fees and costs.

The irony of the ESG is that the political establishment
dictating on how investment professionals should safeguard client
money and conduct business, is the very one that is influenced,
and, in certain cases, funded to promote the ESG policies it
advocates. This article does not intend to argue for or against ESG
but rather it is an attempt to put forward a few thoughts on how to
improve/strengthen its application by touching upon the
“G” factor.

Recognising governance as a foundational pillar of ESG is
crucial for organizations aiming to create long -term value, foster
stakeholder trust, and align their interests with those of
potential investors and the wider public. A strong governance
framework ensures accountability, transparency, and ethical
behaviour, ultimately contributing to the organization’s
overall sustainability and positive impact on society and the
environment.

Zooming into governance, it becomes clear that it is concerned
with how an organization operates in terms of, amongst other
things, its board diversity, internal controls, shareholders,
controls, audits and policies, including compliance and
anti-corruption policies. This could also include taking measures
to ensure that the rights of the directors, shareholders,
management and / or employees are adequately protected and helps to
ensure alignment of their interests together with the interests of
investors and the public. Notably, there has been a shift in
practice recently by also focusing on the interaction of an
organization with stakeholders like suppliers, competitors, and
governments in an effort to balance the compliance with market
preferences, while maintaining a sustainable business plan.

The metrics that can assist in evaluating corporate governance
performance are quite complex and variable. However, there are
certain key areas that corporate bodies could focus on improving,
to ensure good corporate governance, including the following:

1. Board composition, quality and integrity




2. Ownership and shareholder rights




3. Remuneration




4. Risk and crisis management




5. Relationship with stakeholders, i.e., shareholders, employees,
   suppliers, customers etc.




6. Ethics and transparency

Combined, these elements would unavoidably provide the ground
for enhancing ethical conduct, transparency, and responsible
decision-making. Board composition, quality, and integrity lay the
foundation for effective leadership, ensuring diversification on
perspectives and expertise. Ownership and shareholder rights
generate confidence among investors, fostering a sense of ownership
and alignment with the organization’s vision. Emphasizing on
fair remuneration practices not only fosters a culture of fairness
but also serves as a strong incentive for sustainable
performance.

An organization’s readiness to handle challenges is
showcased throughout risk and crisis management strategies.
Maintaining positive and open relationships with stakeholders
reinforces the organization’s commitment to fulfilling their
expectations, whilst upholding strong ethics and transparency
builds trust and strong relationships with all stakeholders,
driving sustainable growth and positive impact. On a similar note,
emphasizing proper accountability and transparency in governance
fosters a positive corporate culture that attracts socially aware
investors, engenders stakeholder trust, and positions the
organization for long-term success.

As “E” and “S” continue to take the central
stage, it is crucial to acknowledge the “G” force within
the ESG context; even more so when dominant investment profiles
become younger and traditional investment norms across the
financial services landscape shift to a more responsible investment
approach.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.