ESG governance factors:
Meaning, examples & improvement
Learn how your organisation can improve its ESG governance rating & why it's now mission-critical.
Understanding the 'G' in ESG
What's the 'G' in ESG?
The ‘G’ in ESG stands for ‘governance’ considerations. Governance ESG criteria cover corporate policies, stakeholder rights and responsibilities, as well as how the corporation is managed and its success measured.
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With such a high focus on climate risk and social factors, it is easy for the ‘G’ in ESG to be overlooked. However, poor governance can lead to dire consequences, such as the Facebook data scandal for example. Good governance is critical for building public faith and confidence in the business, as well as growing the share price.
See also:​
Corporate governance is a critical component of both ESG and GRC (governance, risk and compliance). The main difference between the governance aspect of ESG and GRC is that ESG is concerned with independent criteria of particular interest to investors, whereas GRC is concerned with the procedures and processes that ensure good governance.
What's the difference between ESG and corporate governance?
ESG governance factors
The following are examples of important ESG governance factors for organisations to consider:
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Makeup of the Board
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Shareholder rights
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Corporate performance metrics
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Management structure
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Company policies and values
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Health and safety
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Information disclosure
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Auditing and corporate compliance
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Data security and cyber risk
Common ESG governance factors
impacting companies
ESG governance factors may seem rather abstract but below average-ranking companies are particularly prone to mismanagement. Here are some examples.​​
Lack of diversity on boards
S&P Global Market Intelligence research revealed that firms with more women on their boards of directors and in C-suite positions had greater financial performance than less diverse companies. By contrast, organisations where the Board is made up of 75% or more white males are at risk of falling behind both in terms of reputation and financial performance.
Conflicts of interest and poor executive judgement
The most obvious ESG governance risk to organisations is poor judgment on the part of the CEO and/or Board. An example of this is when CrossFit founder and former CEO, Greg Glassman, was pushed out of the company after he made incendiary comments about the death of George Floyd. Although he admitted to making “a mistake” with his words, Glassman later stepped down as CEO, as sponsors of the company’s flagship event began dropping out in response to his comments.
Unconsidered and inflated leadership compensation
US and UK regulators require publicly traded companies to allow shareholders to vote regularly on executive compensation packages, which are commonly a source of criticism in the media. And in fact, in the US, companies are now required to disclose the ratio of CEO-to-median employee pay annually.
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Companies with a careless approach to CEO compensation risk public scrutiny and criticism, as when Elon Musk publicly shamed Twitter for its compensation of board members and executives. In addition, companies could soon face penalties for paying their CEOs or other executives 50 times more than the median employee pay.
ESG governance best practices
Below, we look at examples of important business services in a few different industries and how they pertain to operational resilience.
1. Improve diversity on the board and C-suite
For enterprises today, it’s essential to demonstrate diversity in the Board of Directors. This is already happening, with white men, who held 60% of board seats in 2020, now only hold 23%. However, there are still companies in which white males make up 75% or more of the Board, and these organisations are being called out by the media.
2. Implement workforce best practices
Because transparency and accountability are now such high-profile ESG governance issues, organisations need to take the necessary steps to ensure they’re beyond reproach, including:
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Adopting policies in line with law and applicable regulations
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Commitment to ethical values and behaviour
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Documented Board meetings
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Director training and board evaluations
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Subsidiary governance structures or policies
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Documenting governance practices and procedures
3. Transparent ESG governance reporting
Time and time again, we’re reminded of how critical transparency is now in reporting, especially in relation to ESG governance. Vague information, unsubstantiated claims, and vanity ESG metrics are no longer tolerated by stakeholders.
In September 2020, the World Economic Forum and its International Business Council (IBC) published a consolidated set of standards, which organisations can now follow.