Continuing my blogs on ESG, in this one I want to focus on the G, which stands for Governance.

The governance structure of an organization determines how well it is run and directly reflects on its sustainability. Needless to say that investors are attracted more towards organizations with good governance practices, as such companies are more stable and have mitigated the risks that can have surprise and severe impacts.

When we talk about governance, there are a few distinct areas that we need to focus on. At the top of the list come the corporate governance structure, which is determined by the structure of the board, and the transparency with which it is formed. Factors like corporate disclosures, executive compensation, protection of the minority shareholders, conflict of interest disclosure and resolution, etc. are extremely important for the corporate.

The next would be the codes of business conduct and the risks they pose if breached. We have witnessed a lot of horror stories in the recent past, where organizations have suffered not only on the financial front but also had to take a hit on their reputation owing to shaky policies around business ethics. Nowadays, compliance practices are given a lot of importance by investors to avoid such risks.

Several other aspects constitute the governance framework of a corporate. Be it the supply chain of the business, the tax strategies, or stakeholder engagement policies, governance does not necessarily mean that the corporate is performing to the best of its capabilities. It just ensures that the different aspects of business are documented, transparent, and monitored, implying that deviations will be promptly captured and corrected before they go out of control.

Though for the common people, the G is not as attractive as the E and S of ESG, understanding it is extremely critical, as governance risks and opportunities will likely increase as social, political, and cultural outlooks continue to evolve. A company scoring high on all three fronts will be regarded much higher than one which has a weak pillar.

Summing up this series of blogs on ESG, I would like to mention that irrespective of the scores and impacts on investor outlook, if the ESG strategy is followed in true spirit by any company, it can serve as a strong differentiator, building trust with stakeholders, protecting the organization’s reputation and increasing consumer engagement. ESG will help in the long-term growth of the company with a positive impact on society.

A win-win for all.