The social side involves a company’s relationships with employees, suppliers, customers and communities, including DE&I initiatives, human rights, community impact and health and safety.
Corporate governance arguably goes under the radar, but senior executives say that should not be the case.
So how is it defined?
Corporate governance is the internal system of practices, controls and procedures a company adopts to govern itself, make effective decisions, comply with the law and meet the needs of external stakeholders.
“Corporate governance looks at the management and oversight of companies,” explains Amy Brachio, Global Vice Chair of Sustainability at EY. “Businesses have the potential to significantly accelerate the shift towards a climate-neutral and sustainable economy, but to fulfil this potential, they must adopt governance measures that reflect a deep understanding of their actions' repercussions on the global landscape.”
Jonah Smith, Vice President, Environmental, Social, Governance (ESG) Strategy and Programs at IBM, agrees: “For IBM, corporate governance is about creating innovations, policies and practices that prioritise ESG progress simultaneously with ethics, trust, transparency and – above all – accountability.”
There is little point in corporate governance as a box-ticking exercise, however.
“When it is effective, it is really part of the culture,” says Marcel Martin, Chief Corporate Affairs and Sustainability Officer at Coca-Cola HBC. “It is becoming standard practice, which in turn is creating trust and collaboration across the entire value chain.”
The ‘G’ of ESG
Corporate governance is the foundation of the environmental and social parts of ESG that sets the rules and processes and provides performance measurements to ensure transparency.
“Corporate governance has a profound effect on ESG,” Amy says. “The decisions of the board affect how much sustainability is prioritised and can help to ensure that sustainability is integral to corporate strategy and operations.
“While we increasingly see climate commitments turn into action, with boards recognising the need to have sustainability as a core part of the business, we also see a lack of robust transition planning amongst some companies.”
EY’s Climate Risk Barometer reports that, despite agreeing to climate commitments, nearly half (47%) of companies surveyed do not disclose a transition plan to back these – this is where corporate governance comes in to support.
Jonah’s framework at IBM sets a great example. He says: “IBM has a top-down approach in terms of our ESG governance that starts with our Board and our CEO, extended from there to our ESG SteerCo and then to cross-functional working groups.
“IBM’s leadership stays true to its commitment towards a transparent and ethical business model. As leaders in the tech industry, this responsibility includes creating better innovations, policies and practices that benefit everyone in society.”
Using CSDDD to your advantage
For companies in Europe, the recently-passed Corporate Sustainability Due Diligence Directive (CSDDD) will be a big part of the future of corporate governance.
“The CSDDD legally requires companies to be accountable for environmental and human rights issues within their supply chains,” Amy explains.
“The directive has potential to transform corporate accountability and the need for companies to focus on sustainability and implement rigorous due diligence processes.”
“In order to have proper reporting and to establish and maintain trust with stakeholders, it is very important to have in-house capabilities,” says Marcel.
“Reporting requires specific measurements. It’s not only about devices and technology, but about human knowledge. And when it is built over a period of time – like at Coca-Cola HBC – it becomes part of the culture, second nature and easy to expand.
“For us, it started in the supply chain and expanded to all the other functions so that we can now use the opportunity of new regulatory framework to help all the functions. And so sustainability becomes a new value creator.”
Reporting: Keeping stakeholders sweet
There are two key things that make good corporate governance critical as a catalyst to ESG according to Jonah, the first being that it promotes transparency and accountability.
“Both transparency and accountability are fundamental to help accurately measure ESG metrics for a positive impact,” he explains.
“Having strong corporate governance basically establishes the foundation in the organisation to be able to strategise, guide and execute all ESG initiatives with meaningful metrics.”
The second? Aligning stakeholders.
“It helps align business and social impact strategies across diverse stakeholders of a company’s value chain,” Jonah explains.
“If a company wants to have a lasting and positive impact, it needs to focus on the issues that are meaningful to its mission as an organisation.
“The key to having a successful ESG strategy is to develop it aligned with the company strategy and business priorities. This way all the material aspects of ESG will be relevant to your corporate stakeholders.”
Expecting the unexpected
As climate risk increases, reporting can become more challenging for companies that are not prepared. But for those that have the foresight to be on top of regulations, keen reporting can be an essential risk management tool.
“In the face of an evolving business landscape, corporate governance has become increasingly pivotal in risk management and compliance,” Amy says.
“The risks businesses face have expanded over time, with the climate crisis and the global pandemic underscoring the importance of resilience for growth. These shifts have illuminated the need for robust corporate governance to navigate these complexities.
“With a background of almost two decades in risk management, it’s possibly not a surprise that I believe it’s critical that sustainability is approached through a lens of risk management.”
Amy adds: “To do this requires that we acknowledge the critical role of reliable reporting and robust management practices in addressing issues ranging from regulatory and compliance demands, customer pressure and the reputational risks associated with greenwashing, to the challenges posed by an increasingly volatile geopolitical landscape.”
“It’s crucial that we bridge the divide between climate ambition and action, ensuring that everyone is included. The effects of climate change are already upon us, and no individual or business is exempt, including our business.”
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