ESG reporting has become a common practice implemented by major and minor companies. Accounting for any potential risk factors to determine a value for projects and companies is just sound business. However, it wasn’t always so. The ‘Governance’ within ‘ESG’ is what pulls the environmental and social consciousness into the financial and investment realm, without which there can be no true valuation of a company’s sustainability performance.
A widely adopted style of corporate governance is the Global Reporting Initiative(GRI). The evolution of GRIs mirrors the shift in awareness that we as a global society have undergone – from economic growth to sustainable economies. Initiatives taken by the Ceres and Tellus Institute in 1999, with the help of UNEP, led to the release of the first draft of the Sustainability reporting guidelines.
The UN Global Compact, the world’s largest corporate sustainability initiative, and the GRI, the world’s leading organization for sustainability reporting, have defined the standard by which companies disclose and report their sustainability performance. While their reporting methods have been criticized, some may say, constructively, that their history defines their relevance today.
The GRI framework promulgates transparency regarding the impact companies have on pressing issues that plague us on a global scale. There is an undeniable demand and supply of disclosure within corporations. The ESG space continues to grow, and with that, the scope of sustainability reporting.
The Scope of Corporate Governance:
Non-financial corporate reporting is growing in recognition and value. The UNGC and GRI are constantly evolving and updating the best practices for corporate reporting on SDGs.
Companies, in turn, realize long-term benefits of corporate reporting – reducing risks, attracting new investors and shareholders, and increasing the company’s equity.
Firms invest in companies that have low risk; they need to know if a company is fit enough for a long-term investment. Some of the main corporate governance issues include:
- Salary of CEOs/key executives
- Independence of the Board of directors.
- Internal mechanisms to combat bribery, corruption, money laundering
- Stakeholder engagement: transparency, accountability
Ensuring companies are risk-free is no simple feat; however, by utilizing the same metrics that we use to define democracy, it is easier to hold companies accountable. Following are the four fundamental pillars of democracy:
1. Free media – Media’s reporting on problems (such as executive remuneration) that can create huge reputational risk
2. Civil society and community mobilization – Having board diversity with equal gender & race representation
3. Judiciary – Taking judicial actions against non-compliance with business ethics policies, such as those on conflicts of interest, bribery, and corruption, money laundering, etc.
4. Government pressure – SCC audits/SEBI audits where pressure can be put through a mandatory remedial action.
Once a company showcases that they have and can maintain the integrity of these four pillars, they might become a company with a comparatively lower risk.
A company would be ‘risky’ if it disregards Society, Customer, Labor, Human Rights, and Environment. Following are the three outcomes of the risk that all companies try to avoid:
- Risking the brand image of the company
- Going into legal battles
- Operational issues/operation closure.
Corporate Governance to Minimize Risk:
Each of the below-listed ESG segments, classified by PRI (principles of responsible investment) represents risks for companies and investors. However, good corporate governance, while a risk in itself, can be the key to managing all other ESG risks.
ESG is divided as follows:
4. Human rights
6. Corporate governance.
Therefore, to maintain social and environmental risks it is important for companies to have strong corporate governance.
Corporate governance practices often fall under scrutiny in the event of a merger or acquisition. The collapse of international giants such as Enron, World Com (US), and Xerox (Japan) is said to be due to the absence of good corporate governance and the adoption of corrupt practices by the management of these companies and their financial consulting firms.
Awareness campaigns stretching back decades have (slowly) come to fruition today, saving the bottom-line of companies that were threatened by the lack of corporate governance and compliance. While we still have a long way to go, it wouldn’t be wrong to take a step back and appreciate all the game-changing policies and guidelines that have been developed to ensure corporations uphold humanitarian integrity. Integrating sustainability as a corporate practice upholds a fundamental, simple truth; what’s good for the environment, is good for you (and your company’s bottom line!).