INVESTMENT COMMUNITY PERSPECTIVE – Guest Column

Good governance (the ‘G’ in ESG) has been widely recognized as an important tool to address the asymmetry of information between investors and management, enabling economic growth through dispersed ownership of corporations. It has often been postulated that by getting the ‘G’ right, you tend to get better outcomes on environmental and social factors (the ‘E’ and the ‘S’). Thus, the question that we must address is: Are we getting the ‘G’ right when it comes to enabling collaboration and stewardship on sustainability issues? Thankfully, there is an emerging body of research that is beginning to establish some best practices in governance with regard to sustainability.

 In April 2018, the Canadian Coalition for Good Governance (CCGG) published The Director’s E&S Guidebook. The guidebook includes 29 recommendations in eight key governance categories, with two objectives: (1) Bring a broader perspective and drive deeper dialogue between companies and investors, and (2) Support Boards in developing a robust principles-based approach to E&S Governance. 

Also in 2018, the Conference Board of Canada published a report titled Embedding Sustainability Into Corporate Governance. The report provides a useful assessment of the current status and standards in sustainability governance, and highlights 15 emerging best practices in five key governance categories.    

While the frameworks for the two studies are slightly different, they are in agreement on much of the outcome. For the purposes of this article, we have summarized the key governance categories from each report and, in the table below, provided an abbreviated version of some of the key recommendations. However, we encourage interested readers to read the full reports on our website, http://www.jflglobal.com/articles.    

Table 1:

Investor Perspective

From our perspective, as long-term investors, we welcome multiple voices in this conversation, and applaud the efforts to reach a diverse base of stakeholders in the capital market system. Board oversight and accountability for sustainability creates a substantive feedback loop to effectively identify, manage and report on these issues. Fundamentally, Boards need to determine what E&S factors are aligned with long-term value creation for shareholders and the sustainability of the business, including the long-term health of the broader economy. In essence, environmental and social issues are not separate, but rather core to good governance and the long-term success of the company. 

As illustrated above, a sustainability governance tool kit is evolving, along with empirical evidence that demonstrates positive correlation with improved corporate financial performance. For example, the adoption of relevant E&S metrics in executive compensation structures has been shown to lead to “i) an increase in long-term orientation; ii) an increase in firm value; iii) an increase in social and environmental initiatives; iv) a reduction in emissions, and v) an increase in green innovation”[1]. And yet it is important to point out that E&S Governance is a journey, and there is no one-size-fits-all approach. Companies should assess their situation and adopt recommendations that are right for their business and for all stakeholders.  

Equally important, companies need to understand how “Investor needs may differ from other stakeholders. Investors are focused on long-term, sustainable value, so it is important for a company to articulate how their E&S-related activities create value for the business and shareholders. Boards need to understand and articulate why they undertake sustainability initiatives as it relates to corporate value.”[2]

Next Steps

Governance is a primary framework to bridge the gap between companies and their stakeholders. It provides the critical infrastructure for collaboration and engagement through transparency, equity and accountability. Better governance of sustainability issues that are clearly linked to the long-term value propositions of companies can help drive them toward improved long-term performance that benefits investors, stakeholders and the wider economy for generations to come.