Governance: The “G” in ESG Investments

By Barnes Gladman, Financial Designer with Anstee & Co.

Governance is the third in a series of three articles about Environmental, Social and Governance (ESG) Investing.

First of all, when analysing Environment, Social and Governance factors with regards to investment, quite often the ‘G’ element is eclipsed by climate concerns, sustainability and societal implications linked to the ‘E’ and ‘S’ aspects. However, huge corporate scandals such as Facebook’s misuse of data, and Volkswagen’s emissions tests, have poor corporate governance practices at their core. Corporate governance underpins every organisation’s ability to achieve its environmental and social objectives, making the ‘G’ a key component of ESG, and any investment decision-making process.

In the last 18 months, there has been a huge influx of investment into “socially responsible” strategies. It is no coincidence this runs parallel to a time that has seen a global pandemic, reports of worldwide climate emergency and lights being shone upon social injustice and inequality.

The term “ESG” has become hugely more prominent in recent times and is defined as the consideration of Environmental, Social and Governance factors alongside traditional financial elements in investment decision-making. However, what does investing in these areas truly mean?

Governance: The ‘G’ in ESG.

Investment focused on the ethics of a business, including board practices, stakeholder engagement and the management structure. Companies that show integrity in everything they do, are strong on tackling corruption and act transparently when making corporate decisions.

When incorporating Governance into the investment process, the following elements are considered:

• Boardroom diversity – A diverse board better reflects investors, customers and a company’s community, through offering wider perspectives, innovation and more robust decision making.
• Executive Remuneration – Research has shown, the most commonly cited reason for a lack of trust in an organisation, is the perception that executives are overpaid in comparison to other staff members and are in receipt of inflated bonuses.
• Compliance ­– Failure to comply with regulations, or to fulfil obligations such as audits, accounting and information disclosure, can seriously damage a company’s reputation, affecting revenues and longevity.
• Board Positions – Limiting how many boards a director can sit on avoids obvious conflicts of interest. This ensures no compromise of loyalty towards one organisation’s stakeholders over another’s.
• Policy – The creation and implementation of policies that are both in the best interests of stakeholders, whilst not negatively impacting the environment, or society. Without Governance, there can be no Environmental or Social, in a business model.

Which Governance should take priority?

Opinions can be split upon what should take priority in corporate decision making; one argument is that maximising financial returns for shareholders is the main purpose of a company’s operations, whilst on the flip side some believe stakeholders deserve more consideration over pure profitmaking. Organisations have made steps towards promoting the latter, an example Business Roundtable, an association of Chief Executive Officers of America’s leading companies, professed that companies should concentrate on providing benefits to all stakeholders, alongside deriving profits for shareholders. Over 180 CEOs of major corporations worldwide declared their support.

Alongside this, S&P Global’s research on Governance factors has shown that companies who rank poorly on governance characteristics are prone to mismanagement and lessen their ability to capitalise on business opportunities over time. The effect good Governance practices can have on company longevity is a key factor in the investment manager’s decision making.

Is Governance critical to business success?

As companies implement and expand on their environmental and social policies, inevitably this will demand a similar increase in reporting and regulatory framework. Governance will drive the growth of regulation, and the embedding of such policies within boardroom practices. As environmental, social, political and cultural attitudes continue to evolve, understanding the role Governance plays in assessing the increasing risks and opportunities, is critical to any business’ success.

Good corporate governance doesn’t just have a moral value, it also has economic value. Investing in sustainably run companies with strong governance practices ensures longevity and provides the assurance management is doing what is best for both shareholders and stakeholders alike.

At a time when COVID19 has created challenges and heightened issues for corporate leaders around the world, it has perhaps never been more important to consider the integrity, transparency and structure of a company when contemplating an investment.

How Anstee & Co can help you with your Investments.

Is ESG investing right for you? If you want to reach your financial goals, whilst also considering your impact on society and sustainability, then socially responsible investments may be the perfect fit for achieving your objectives.

If you would like to find out more about investments in line with your ethical view, then why not contact Barnes to find out more. The initial meeting is at our expense and is without obligation. As Independent Financial Advisers (IFA’s), the financial advice we offer is truly unbiased. Our experience covers all aspects of financial planning, including pensions, estate planning, mortgages and investments.

Our offices are located at-

• Kettering, Northamptonshire
• Stamford, Lincolnshire
• Towcester, Northamptonshire
• London, Greater London

Additionally, we made use of meeting rooms in-

• Market Harborough
• Bedford
• Lutterworth

Also, we make full use of video conferencing facilities such as-

• Zoom
• Microsoft Teams
• Skype
• Facetime

We can also arrange a conference telephone call. There is no need to visit an office as all work can be handled remotely.

So, if you have any thoughts or comments on this article, “Governance: The G in ESG Investments.”, then we would love to hear your thoughts.

Finally, the information contained in this article is for information purposes only and does not constitute advice. No action should be taken based on this information alone. Anstee & Co. is authorised and regulated by the Financial Conduct Authority (FCA).