Talking about the G in ESG

Is the governance aspect of ESG being overlooked? We discuss how proactively talking about the ‘G’ strengthens a company’s overall ESG narrative.

16 May 2022 . 2 mins

During a recent guest lecture at the School of International Financial Services [1], we argued that governance had become a “dissatisfier” within ESG: it’s overlooked in many cases, unless a major corporate credit event or controversy occurs. However, proactively talking about the ‘G’ strengthens companies’ overall ESG narratives.

Governance generally has a prominent place in ESG analytics. A survey by Russel Investment[2] finds that 91% of investors consider the G in ESG the factor with the greatest impact on investment decisions. Major ESG rating agencies typically assign it a 15-33% weighting as part of their overall assessment.

Yet, it is at times an overlooked factor in sustainability discourse – whether that be in the public arena or in issuer-investor engagements. Google searches on the topic[3] pale in comparison to environmental themes. And, during ESG-focused roadshows it is not unusual for meetings to centre exclusively on the ‘E’ and ‘S’.

One reason for this is that the ‘G’ does not fully lend itself to pure numeric analysis as it lacks the clear-cut, scientific standards that have been particularly helpful for environmental analysis (such as the carbon impact of economic activities for climate change mitigation analysis).

So, how best to talk about governance? For a good understanding of the strength of ‘G’ in companies, the context of its use is required. Investors want to know how corporate governance supports the ‘E’ and the ‘S’ in ESG. Hence companies should proactively provide answers for ‘G’-questions that would typically arise from sustainability investors across a range of strategies, such as:

Risk management: are appropriate governance procedures in place to manage environmental and social risk?
Impact: what policies are in place to oversee new environmental and social investments?
Exclusion: what responsibilities and processes are in place to ensure the company does not invest in particular activities or countries?

There are a variety of guidelines that can form the heart of such issuer and investor discussions. This often requires an accumulation of both traditional corporate governance frameworks (such as the ICGN[4]) together with ES-focused governance frameworks (such as TCFD[5]).

Hence, to present a full sustainability narrative that provides investors with a clear picture on how governance strengthens and ensures the delivery of ‘E’ and ‘S’, companies should consider presenting their governance factors more explicitly. Doing so won’t even require major changes in companies’ presentations or ESG narratives: it’s more about a subtle increase in emphasis – rather like a chord change from G-minor to G-major.

Source

[1] https://www.sifs.co.uk/w/uk/seminars/170-should-the-focus-be-on-the-g-in-esg 04/2022
[2] https://russellinvestments.com/uk/blog/2018-integrating-esg-survey 09/2018
[3] Google trends Data : searches for ‘Environmental’ themes are around 15 times more popular than those for ‘Governance’ themes
[4] https://www.icgn.org/icgn-global-governance-principles 2021
[5] https://www.fsb-tcfd.org/publications/

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Talking about the G in ESG

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