Governance – not within ESG but of ESG
The management and understanding of ESG factors, either within a company or as part of an investment process, requires appropriate scrutiny and oversight, particularly as this relates to implementing change.
William Bryant, Head of Advisory
ESG stands for environmental, social and governance, and typically when using the acronym the focus is on the management and understanding of these three topics, whether as a corporate or an investor. However, as with other corporate and investment activities, the overarching governance of ESG, corporate sustainability, responsible investment practices or any other related terms is critical and subject to increasing scrutiny.
Establishing a strong foundation of roles, responsibilities, policies, and procedures to govern the oversight and day-to-day management of ESG considerations is a vital initial step when formalizing and enhancing the activity at a firm. This is essential not only due to the benefits robust governance functions bring to change management but also to ensure compliance, adhering to the principle of 'saying what you are doing and doing what you are saying,' and aligning with investor expectations.
When reviewing past scrutiny surrounding responsible investment and ESG considerations at asset managers, often instigated by the SEC, one common allegation consistently arises. It relates to the absence of necessary internal controls and procedures to ensure that a stated policy or practice was being followed. This underscores the significance of having robust governance over one's policies and implementation procedures.
Economy-wide regulation and frameworks require transparency into the governance of responsible investment activity. Both TCFD (climate-related disclosure) and its nature focused cousin, TNFD, have governance as the first of four main principles, requiring transparency into the role that boards and management have.
For investors that are signatories of the PRI, the largest section within their annual reporting is the governance section. Signatories are required to provide insight into how their responsible investment processes are governed, overseen and implemented – detailing who has what role and responsibility, what training has been undertaken and KPIs implemented, along with other governance related topics.
For corporates under the incoming CSRD, within the universally mandatory ESRS 2, there is a section focused on governance. Similarly, to the TCFD and PRI, this is looking at roles, responsibilities, incentives, with respect to the management of sustainability issues. In fact, the whole CSRD can be seen as focused on the corporate governance of sustainability factors.
Governance is fundamental in corporate and investment management, the governance of ESG issues is no different. Having the appropriate structures in place is not only a current requirement but is expected to undergo even greater scrutiny in 2024 and beyond.
For further information on how to implement the appropriate governance structure for your firms, please reach out to info@northpeakadvisory.com.