If the G in ESG is the hardest to visualise, take a closer look

In our final blog casting an eye over the E, S and G respectively in ESG, Punter Southall Aspire’s Gavin Zaprzala-Banks, managing principal in defined contribution pension consulting, reflects on how governance can be harder to visualise than the environmental and social elements yet, arguably, plays a much more critical role in making the whole greater than the sum of its ESG parts.

On the surface, the G (governance) can all too easily be overlooked when evaluating the impact of ESG.

As highlighted in Steve’s blog, it does not carry the weight of the environmental snowball that has been thundering downhill while gaining in scale, for many years.

Nor has it reached the cultural exposure of the social spotlight that has been shining more brightly, as described by Claire.

It may seem that governance is underserved and overlooked. The invisible man next to its headline-grabbing peers.

But when you take the time to explore further, you will see that it is governance that is the lynchpin of the whole piece.

If you are looking for evidence of how well an organisation is run, the answer lies in governance. Here, we are talking about far more than investment impact and potential return. Governance brings us right to the heart of what an organisation stands for, how it presents its core values and behaviours and most importantly, how it acts in line with those.

If we look at the areas that governance addresses, we see that these are not simply dry, regulatory, tick-boxes. Instead, the focus is on huge, fundamental concerns that are inseparable from moral and ethical judgements. Bribery and corruption. The proportionate balance of executive remuneration. Diversity and inclusion within the boardroom.

Profit before integrity. When one is weighed against the other, will the result show an organisation in a favourable light?

The behaviours that in part lead to the financial crisis of 2008 were in part due to systemic failings in governance.

The reaction of companies to the Russian invasion of Ukraine is a factor in their approach to embedding governance.

VW now faces costs of £193m to drivers in England and Wales alone following the “dieselgate” scandal which arose from corporate governance practices.

And all of that is without even considering the reputational damage and destruction of hard-earned trust.

Governance plays a part in how every single business is run. The challenge is determining what the framework of good looks like, agreeing suitable methods for assessment and ensuring that accurate information is widely available.

Governance starts at the very top but has to filter successfully down through the conduct of every member of a business to be truly impactful. And when this is achieved, the long-term outlook for those businesses and investors becomes stronger and more sustainable.