Overview: Role of ESG in Corporate Governance

INTRODUCTION

Environmental, Social, and Governance (ESG) factors have become essential in shaping corporate governance practices because they address important environmental, social, and ethical considerations. Companies that prioritize ESG are more likely to be sustainable and socially responsible, which is increasingly valued by investors and stakeholders. By incorporating ESG into governance, companies can enhance transparency, accountability, and long-term value creation. ESG is gaining recognition and influencing corporate decision-making. The objective of this article is to discover and provide information about what ESG factors and what is corporate governance, and what role ESG plays in modern corporate governance.

WHAT IS ESG?

Before proceeding further and learning about what significance the concept of ESG holds, let us clarify the meaning of the term ESG. The ‘E’ in ESG refers to the environment, the ‘S’ refers to social and the ‘G’ stands for governance. The Environmental, Social, and Governance (ESG) framework serves as a tool to help stakeholders comprehend how an organization manages opportunities and risks associated with these criteria, which are also referred to as ESG factors.

Sustainability is viewed holistically by ESG, which goes beyond environmental concerns. Usually, the term ESG is used in the context of investors and stakeholders only. But this concept includes not only the investing community but also the customers, suppliers, and employees who all are increasingly interested in how sustainable the operations of an organization can get.

EXTENDED MEANING OF ESG As stated above ESG stands for environmental, social and governance factors, the following section explains these factors in detail:

● Environmental: Environmental factors refer to the effect on the environment due to the functioning of the organization and its risk management practices. It talks about the firm's efforts to reduce carbon emission and environmental footprint, to conserve resources and to promote sustainable practices. This includes initiatives such as managing stewardship over natural resources, managing waste and pollution, and adopting environmentally friendly technologies.

● Social: The social pillar refers to an organisation’s relations with stakeholders. A company could be evaluated based on a variety of criteria, including its influence on the communities in which it operates as well as human capital management (HCM) measures like fair salaries and employee engagement. A distinguishing feature of ESG is the way that social impact requirements have spread to supplier chain partners outside the company's walls, especially to those in underdeveloped nations where labour and environmental regulations may be less stringent.

● Governance: Governance refers to the structure of policies and practices that guide a company's decision-making processes. Pleasant governance includes having an independent board of directors, transparent financial reporting, effective risk management, and ethical business practices. It also involves aligning the interests of the shareholders with the long-term sustainability of the organization.

WHAT IS CORPORATE GOVERNANCE?

To understand the role of ESG in corporate governance, it is necessary to understand the term Corporate Governance. Corporate governance is like the rulebook that guides how a company is run. It's all about making sure that the company is being managed fairly and responsibly. This involves things like setting up a board of directors to oversee the company's activities, making sure there are clear roles and responsibilities for everyone involved, and having proper checks and balances in place to prevent any wrongdoing. One of the main goals of corporate governance is to protect the interests of shareholders. Shareholders are the people who own a part of the company, and they want to make sure that their investment is being taken care of. So, good corporate governance helps to ensure that the company is being managed in a way that maximizes shareholder value and is transparent and accountable.

Corporate governance also looks at the relationship between the company and its stakeholders, which can include employees, customers, suppliers, and the wider community. It's about making sure that the company is not just focused on making money, but also on doing the right thing and being a good corporate citizen.

ESG AND CORPORATE GOVERNANCE

It has been made clear by this article what ESG stands for and an easy-to-understand interpretation of the term corporate governance has also been provided. Now the question is how are these two terms related and how ESG affects the corporate sector?

Well, ESG plays a significant role in corporate governance. When companies incorporate ESG factors into their governance practices, it means they consider environmental, social, and governance aspects in their decision-making processes. For example, on the environmental front, companies may implement sustainable practices to reduce their environmental impact.

This can include initiatives like reducing carbon emissions or implementing renewable energy sources. Socially, companies may focus on promoting diversity and inclusion within their workforce, ensuring fair labour practices, and contributing positively to the communities they operate in. Lastly, governance-wise, companies may prioritize transparency, accountability, and ethical behaviour in their operations.

By integrating ESG into corporate governance, companies can enhance their overall sustainability and align their values with their actions. Investors who prioritize social responsibility as well as other stakeholders, such as staff members, clients, regulators, suppliers, and distributors, seek information about a company's position on socioeconomic issues, sustainability initiatives, and corporate governance procedures.

BENEFITS OF ESG IN BUSINESS

For investors as well as enterprises, utilizing the ESG framework can yield real benefits. Investments linked to an ESG-centric brand allow investors to show their beliefs and frequently yield returns that are on par with or higher than those of traditional methods. For businesses, it provides access to a wider pool of finance and strengthens brand identification.

Some of the various benefits of using ESG-based strategies for business are listed below:

● It offers a competitive advantage: Engaging in ESG initiatives helps companies get a competitive edge. In 2022, for instance, PDI Technologies acquired GreenPrint, a provider of sustainability technologies, which conducted a poll of 1,062 American citizens. The results showed that 66% of the respondents were willing to pay more for Eco-friendly items. According to a poll conducted in 2022 by TechTarget's Enterprise Strategy Group division, 70% of 400 IT professionals believed their organisation would pay more than a 5% premium for IT products from vendors who adhered to strong environmental, social, and governance (ESG) policies.

● Creates attraction for Investors and Lenders: Investors are shifting their focus toward sustainable businesses and eliminating those with outmoded practices, such as paying unfair wages, investing in fossil fuels, using unsustainable agricultural methods, and producing non-recyclable goods, due to public concerns raised by the pandemic, climate change, and the misuse of natural resources. Businesses involved in ESG activities can impact investment decisions and help investors select a low-risk company that offers a sustainable future by giving a full perspective of their operations.

● Builds Customer Loyalty: In a 2021 Accenture survey of over 25,000 customers in 22 nations, half of them said that the COVID-19 epidemic had caused them to reevaluate their priorities when it came to product purchase. These customers are more devoted to companies that treat people properly and are willing to pay more for brands that share their values. Consumers in today's socially conscious market want to know what companies they support are contributing to the common good. By being open and expressing their ESG initiatives to clients, businesses that follow ESG principles can draw in and keep more business.

● Makes firm's operations sustainable: Businesses that engage in ESG projects can endure and adjust to a constantly shifting environment. For instance, companies that effectively incorporate ESG principles into their core business processes are better able to spot cost-saving possibilities and experience decreased energy use, resource waste, and overall operational costs.

CONCLUSION

As far as we have learnt, all of it concludes that Environmental, Social and Government (ESG) plays a crucial role in modern corporate governance. It mainly stresses how a firm should tackle its environmental issues, fulfil its social responsibilities, and focus on ethical practices. The concept of corporate governance can also be summarised to set up the right structures and processes to ensure that a company is being run in a fair, responsible and transparent way. By integrating ESG principles into the core guidelines of the company, it gets to enjoy some benefits as well. And at last it is our world, our environment and we should be the ones to take measures for sustainable development.

REFERENCES

(1) Corporate Governance Institute, https://www.thecorporategovernanceinstitute.com/insights/news-analysis/what-is-esg-and-why-is-it-important/ (last visited March 2, 2024).

(2) Techtarget, https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG (last visited March 3, 2024).

DISCLAIMER

The author affirms that this article is an entirely original work, never before submitted for publication at any journal, blog or other publication avenue. Any unintentional resemblance to previously published material is purely coincidental. This article is intended solely for academic and scholarly discussion. The author takes personal responsibility for any potential infringement of intellectual property rights belonging to any individuals, organizations, governments, or institutions.

ABOUT THE AUTHOR

The author of this blog is Suhasni Sharma. She is currently a 2nd year student pursuing her B.A.LL.B. degree from The Law School, University of Jammu.