10 things you need to know about governance

We recently took part in a networking discussion exploring what business ‘governance’ means within the ESG context.

‘G’ is often the most overlooked of the letters that fall under ESG but it is by far the most important.

We have boiled down over 2 hours’ worth of conversation into the 10 most important points you need to know about governance.

what does governance mean in ESG terms?

At its most basic, ‘governance’ refers to the overall running of a business. What is it mission statement, ambitions, policies and strategic goals? Does the business operate within the relevant rules and laws? How transparently does the business communicate with its key stakeholders? It is an umbrella term for what makes the business tick and a reflection of how it operates.

In an ESG sense, that means looking at an organisation’s daily running and seeing how it integrates a sense of environmental and social responsibility into its operational decisions at every level.

Why is it so important?

We sound like a broken record when we say this – because we say it a lot – but we believe that the letters in ‘ESG’ are the wrong way around. It should really read ‘GES’ or ‘GSE’ because thoughtful governance is the absolute foundation of everything a business might try to do around any robust environmental or social policies.

Good governance is the strategic driver and compass point for everything that follows. Without governance at the core of a holistic ESG policy, all other efforts will remain peripheral, ad hoc and are unlikely to be successful.

how does good governance differ from good policy?

The best way we have come across to describe this is that good governance is the ‘brain’ of ESG whilst policy are the movements that follow. Your body cannot do anything unless your brain tells it to, however subconscious that movement might be.

Good policy flows naturally from good governance, but it is very difficult to put together really structured, impactful E or S policies, without the governance in place to guide your efforts.

but if you already have good social and environmental plans in place, why do you need governance as well?

As we have mentioned, governance provides structure and an umbrella strategy to everything else you might be doing around your environmental and social plans. We believe that for a business to really make a meaningful contribution to the social and environmental needs of the world around us, their ESG strategy needs to be coherent and centralised.

It is great to have pre-existing policies but you need something to tie them together, otherwise nine times out of ten they will remain ah-hoc, siloed efforts which never get rolled up into a broader effort.

who is responsible for governance when it comes to esg (as distinct from legal or financial governance for example)?

The same people that lead a company’s legal or financial governance should lead on your ESG i.e., your board, CEO and senior management.

if we do not have a set of robust governance guidelines in place around esg, does that mean we cannot make a start on our environmental or social plans?

No – no effort is ever wasted! We all have a responsibility to ease the pressure on natural resources and world around us, and the sooner we all start the better.

Just make sure that leaping both feet first into an environmental or social campaign does not leave your broader governance policy development on the backburner. Your governance will give these ‘E’ and ‘S’ efforts structure and long term strategy, and makes sure they are driven forward as part of an overall ESG plan rather than a siloed project that does not necessarily have long term potential.

as well as giving our esg policies a strategic backbone , are there any other advantages to strong ‘g’ credentials?

How long have you got?! The answer is an emphatic yes, many.

In brief there are 3 main advantages to getting your ESG credentials in place:

Regulation – much tighter reporting around large businesses’ environmental footprint and treatment of staff/suppliers/supply chain contractors has already rolled out across the UK, parts of Europe and is under serious discussion in the US. Effectively your provable ESG impacts will become a legal necessity in the mid-term. For now in the UK, these reporting requirements are limited to the top tier 1,500 companies in terms of turnover and staff, so it will take quite some time for this to become law for businesses of all sizes.

However, these large companies (and any others swept up in future regulation) all have supplier networks made up of small companies. We are all part of someone’s supply chain. If one of your big clients must start reporting on its overall environmental footprint, that reporting might well include you.

Recruitment and talent retention – millennials are the driving force within the working world, and Gen Z are fast growing up and entering the work force. The expectation of these cohorts is that the company they work for has a purpose beyond money-making. A 2021 Deloitte report found that 49% of surveyed Gen Z-ers (they spoke to over 8,000 respondents) said their personal ethics inform the type of work they are willing to do. That is half of the incoming workforce. To attract the best talent and keep it, it is no longer enough to offer a good salary and long term prospects – younger workers now expect a company that engages positively with the wider world, tries to make a positive difference and allows their staff to do the same.

Access to investment – given the changes in regulation and keeping an eye on staffing prospects, canny investors are increasingly factoring ESG-policy into their investment decisions. Companies without public ESG commitments and demonstrable strategy have begun to look old fashioned and out of touch – they are putting themselves at a real disadvantage financially speaking. Even if environmental or social issues genuinely do not interest you, they do interest advisors and investors looking at where to put their capital.

are there any disadvantages or pitfalls?

In short no.

The only thing we would say is that any initiative that is to have teeth requires commitment.

We would also strongly advise you not to guild the lily. If you have not done something, or are working on a policy but have not finalised it yet, be honest about it. Customers, clients, suppliers, stakeholders, shareholders, regulators and anyone else you care to mention, are evermore attuned to greenwashing and a single over-burnished claim will compromise the validity of everything else you might be doing successfully. Remain honest and transparent about what you are working on and what you have achieved to date. Transparency is core to good governance.

What if we cannot get our shareholders on board?

Given everything we have spoken about, it is difficult to imagine any board refusing to take this seriously in 2022.

That said we have gone over some pretty compelling reasons as to why it is now or never. Any quick Google will bring up reams of quality reporting as to why this is an issue that must be enacted now. If nothing else, an introduction to the financial implications of failing to act should be persuasive.

cost is a real issue when it comes to choosing more environmentally responsible supplier options. what can you advise a small business to do when this is a genuiune stumbling block?

This is such a great question to end on because it is true. Cost remains a deciding factor for small businesses who do not have unlimited resources (or time or headcount) to dedicate to this.

Companies in the knowledge economy are in a very different position to manufacturers who produce an ‘actual’ object, and for whom supply chain costs take on added urgency. It is therefore tricky to produce a one size fits all answer.

What we would say to manufacturers is that change does not happen in a bubble; the compromises you might be having to make in terms of cost vs. sustainability will be reflected across your industry and this pressure for more affordable sustainable alternatives is driving real change. We are certain that regardless of industry, more responsibly sourced materials and more thoughtfully made components are on the way. It is a question of keeping up the pressure and making changes where you can..

To those with limited budgets in the knowledge economy, there are plenty of changes you can make that do not need huge financial resource to be meaningful. Switching your website to a renewably supplied host is one, as is thinking seriously about your printing needs, your business travel needs or your energy consumption. Once you start researching tweaks you can make (rather than wholesale business pivots) you will find there are plenty of positive changes you can make without too much compromise.

And for everyone regardless of sector, we would say that knowledge is power. These days its also free thanks to the internet. Dip your toe in the water with something ESG-related that interests you – and then use the company as a mouthpiece to share what you’ve learned. The more organisations that engage publicly with this conversation, the more influence the business world will have when it comes to driving positive change and using business as a force for good – without losing sight of your core business activity. Engaging your staff whilst raising you clients’ and broader network’s awareness on the issue is an incredibly meaningful way of contributing to what ESG hopes to achieve.

For more on what ESG means, we have further blogs explaining more fully the “G” in ESG, establishing your own ESG policy commitments and why we think this is all so important.