Why sustainable governance and corporate integrity are crucial for ESG – The European Sting – Critical News & Insights on European Politics, Economy, Foreign Affairs, Business & Technology

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This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Gabriel Cecchini, Director, ESG Integridad, Rachel Davidson Raycraft, Judicial Clerk, United States District Courts, Jane Nelson, Director, Corporate Responsibility Initiative, Harvard Kennedy School of Government, Carlos Santiso, Director of digital innovation in government, Development Bank of Latin America

  • The momentum around environmental, social and governance (ESG) factors is rapidly changing as ESG frameworks continue to grow in influence and impact.
  • However, there is growing recognition that the ESG revolution needs to take more meaningful account of sustainable governance – the G in ESG – and corporate integrity in particular.
  • Corporate governance based on the principles of transparency, accountability and integrity should be seen as a prerequisite for achieving all ESG objectives.

How to define and assess G in ESG? What is the place of anti-corruption in emerging ESG frameworks? And can a company or investment fund be considered “sustainable” if corporate integrity is left out of certification criteria and reporting priorities?

Answering these questions is becoming more and more urgent. Momentum around environmental, social and governance (ESG) factors is quickly materializing into influential corporate rating frameworks, investment criteria and binding laws despite relative inattention to the G in ESG. At the same time, the war in Ukraine and the corporate and investor response added further weight to the meaning and implications of ESG investing and propelled the company’s purpose, values ​​and integrity under the projectors. As the impact of ESG frameworks and standards continues to grow, we must prioritize sustainable governance and corporate integrity in the ESG agenda.

Growing interest in ESG

Investors, boards of directors, senior executives and government leaders are being laser educated on ESG factors as a way to build a sustainable future. Although ESG has entered the global stage at the beginning of the 2000’s, interest in mobilizing non-financial corporate performance standards has increased in recent years in the context of the climate crisis and the COVID-19 pandemic. Many see ESG as key to achieving a just energy transition and mitigating societal inequalities that have been exposed and exacerbated by COVID-19.

As a result, ESG has transformed into a consumer investment strategy and a priority among major business players. For example, in 2020 the World Economic Forum’s International Business Council developed a set of ESG criteria the metrics of stakeholder capitalism for sustainable value creation.

In the meantime, major government bodies and watchdogs have launched ambitious legislative and normative programs that would place ESG risks at the heart of financial services regulation and corporate disclosure requirements. Among the most notable initiatives of this type is the EU Sustainable Finance Disclosure Regulation and other ESG-related proposals in the EU, proposals currently under review by the US Securities and Exchange Commissionand the expected disclosure standards of the International Sustainability Standards Council.

Moreover, the new concept of “dual materiality” extends companies’ disclosure obligations beyond their own financial performance to include ESG factors that affect economies, people and the planet.

The missing G in ESG

However, there is growing recognition that the ESG revolution needs to take more meaningful account of sustainable governance – the G in ESG – and corporate integrity in particular.

The ESG wave has developed alongside the global momentum to fight climate change. While business-related human rights risks have recently attracted the attention of regulators and international organizations, there is a need to strengthen governance-related risks.

“Robust corporate integrity is absolutely essential to the realization of human rights and environmental sustainability,” said Anita Ramasastry, Henry M. Jackson Professor of Law at the University of Washington and member of the Task Force. of the United Nations on business and human rights.

In addition to representing one-third of the ESG equation, sustainable governance must be understood as a prerequisite for achieving all ESG objectives. Behind every breach of a company’s environmental or social commitments lies ineffective corporate governance, whether it be inadequate anti-corruption practices, perverse incentive structures, contradictory lobbying activities, ineffective board oversight or ill-equipped leadership. In sum, sustainable governance factors at the heart of the ESG agenda.

Sustainable governance takes center stage in Davos

At the annual conference of the World Economic Forum in Davos in May, the Partnership Against Corruption Initiative (PACI) raised the G’s profile in ESG through a public session on the importance of invest responsibly in sustainable corporate governance. The roundtable explored why and how investors should focus business integrity beyond compliance within their own practices and the companies in which they invest.

From corporate purpose, values ​​and effective stakeholder engagement to fighting corruption, transparency and accountability, sustainable governance is key to building trust and maintaining a social license to operate. . ESG-based shareholder activism has also accelerated in recent years, demonstrating a clear drive to better align investment practices with broader societal goals and values. Through open communication, thoughtful oversight processes, rigorous measurement and analysis, and increasing attention to the G in ESG, investors and companies can work together to create lasting value for companies, stakeholders and the planet.

In particular, panelists highlighted integrity-focused stewardship as a powerful yet often undervalued mechanism for promoting sustainable enterprises. While divestment captures public attention and is sometimes the only appropriate option, active ownership, engagement and observation allow ESG-conscious investors to use their leverage to help shape a better future. .

“The disposal should be seen as a kind of last resort action and one that could be avoided if the G of the ESG was correctly taken into account,” argued Nicola Bonucci, partner at Paul Hastings, Paris.

Investing in integrity in an increasingly complex world

Further amplifying the G in ESG, the Global Future Council on Transparency and Anti-Corruption recently published a community newspaper titled Investing in integrity in an increasingly complex world: the role of anti-corruption in the context of the ESG revolution. The paper argues for placing corruption risks at the heart of investor decision-making and corporate ratings, with particular emphasis on the growing importance of ESG.

To invest in integrity, investors and standard setters need to integrate governance concerns and corruption risks more effectively into ESG investment frameworks. They must also overcome existing barriers, including inconsistent terminology, scoping and reporting recommendations, and over-greening of ESG relative to other material risks and opportunities.

Business integrity should be at the heart of every aspect of the ESG agenda. Although directly measurable within the G, it is fundamental to the achievement of E and S. It is also essential to the ethical pursuit of ESG standards and the transparent and accurate communication of ESG measures.

3 Recommendations for Incorporating Business Integrity into Investment Decision-Making Processes

In order to better integrate corruption risks into investors’ decision-making processes and frameworks, the Global Future Council makes the following recommendations:

1. Investors must systematically embed integrity into their own commitments, processes, policies and incentives. This includes internal practices and outward-facing initiatives, such as corporate engagement and stewardship.

2. Corruption risks should be incorporated into reporting and rating frameworks in a consistent, comprehensive and standardized way. This should include a common set of core indicators to promote cross-sector and cross-framework comparability and reflect the reality that some risks (and corruption risks in particular) are universally relevant.

3. Investors should take further collective action on integrating corruption risks into investors’ decision-making processes, building on existing industry, sector and territorial initiatives. Such alliances can create platforms for dialogue and industry coordination, as well as a mechanism to engage new voices – including consumers and affected communities – towards systemic change.

Prioritizing Integrity-Centered Corporate Governance

Integrity-centered corporate governance is key to ensuring that ESG enthusiasm translates into concrete actions and the sustainable and inclusive future we are striving for.

While ESG is now a widely recognized concept, its definition and, even more, its impact remain to be determined. As major regulators and standard setters begin the process of publishing and enforcing ESG frameworks and baseline requirements, it is essential that business integrity is at the heart of these initiatives.

Helen D. Jessen