Environmental and social concerns are often centre stage when it comes to socially responsible investing. Issues such as plastic pollution, climate change and diversity are often uppermost in many investors’ minds. However, Governance, the ‘G’ in ESG, is important too. In fact, of the E, S and G factors it can often be the most significant to returns as it determines the overall direction of company policy and how key risks are addressed.
Governance factors measure the quality and robustness of a company’s structure and practices. Good ‘corporate governance’ means being open and honest, respecting the needs of all stakeholders including shareholders, staff, customers and suppliers, as well as society and the environment, and being accountable for actions.
Specific issues can include board structure, independence, executive pay and auditor independence as well as the fair treatment of workers and health & safety. More broadly, it is about business ethics, transparency and accountability. Diversity and equality are also important. Studies have found that people with different gender, race and experiences can jointly contribute to more robust and innovative ideas from which a company is likely to benefit.
Watch our ESG diaries video from William Matthewman: Discussing Governance