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The “G” in ESG: Why is Governance a Driver for Business Sustainability?

ESG in sustainability parlance stands for environmental, social, and governance. These are primary areas of concern for measuring sustainability in investment decisions. And, ESG is a framework with broader applications for defining sustainability practice.

Governance is often the least understood sustainability aspect of ESG. Governance in general is about all things that define and permit activities and decision-making to happen in an organization. Governance can be a rather complex subject, because it covers a range of areas. It defines the culture of an organization. It includes each of the following aspects of operating a business:

  • ownership, board, and management structures;
  • authority, policies, and standards;
  • information disclosure and auditing; and
  • corporate responsibility, ethics, and compliance.

The Organisation For Economic Co-Operation And Development (OECD) provides an authoritative definition of corporate governance. That is:

Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

So how does this understanding of governance appear through a sustainability lens? How can organizations use governance to “firm up” sustainability practices and vice versa?

Governance in support of sustainability expands authority, policies, and procedures to address sustainability issues. It not only creates value. It creates a culture that goes to the heart of sustainability – meeting today’s need without making it impossible to meet future needs. It means looking at social, environmental, and economic impacts and making decisions from a broader perspective. Governance through a sustainability lens changes organizational approaches to issues such as:

  • Land use, energy, water, and emissions;
  • Human rights, equal opportunity, and health, safety, and wellness;
  • Charitable giving and volunteerism;
  • Systems and strategies for engaging with stakeholders, product development, procurement, and innovation;
  • Board composition and compensation; and
  • Ethics, standards, and codes that apply within an organization and to its value chain.

When sustainability permeates governance, leaders become accountable for environmental, social, and economic performance. Three examples of how sustainability governance affects such performance that immediately come to mind are:

  1. Board and Executive-Level Responsibility:  A board committee has primary responsibility for reviewing strategic sustainability matters. A Chief Sustainability Officer has primary management responsibility for creating and implementing sustainability strategy.
  2. Dedicated Sustainability Function:  A sustainability office coordinates corporate-wide sustainability strategy and activities. It leads the company’s sustainability reporting and stakeholder engagement and educates the workforce.
  3. Comprehensive Set of Policies, Directives, and Standards: This portfolio of commitments and guidelines govern all sustainability areas: environmental, social, and economic. For example, an Environmental Policy guides the use of natural resources (e.g. energy, water) and waste disposal. An Internal Stakeholder Relations Policy protects and supports the workforce. A Product Responsibility Policy regulates the product’s life cycle and its economic impacts on the consumer.

When you govern through a sustainability lens, environmental, social, and economic performance improves. This is because sustainability-oriented governance allows companies to embed sustainability practices. They become part of the rules, responsibilities, and values of the organization. You maximize operational efficiency and protect long-term investor, societal, and environmental interests.

Investors, customers, and society all have increased focus on sustainability. Put the right governance system is in place – a sustainability-permeated governance – to drive positive change and innovation.

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