When implementing ESG, we should keep all elements in mind. After all, in addition to environmental (E) and social (S) issues, it is also crucial to fine-tune the way a company is governed – the ‘G’.
Corporate governance is a system of rules, usually in the form of internal regulations and policies, by which a company is managed and controlled. The purpose of these rules is to create an environment of trust, transparency and accountability, which are key to ensuring the stability of the company.
What corporate governance involves
As far as capital companies are concerned, the most common rules to date have been those governing internal relations, designed to minimise possible doubts or disputes as to the powers of the various corporate bodies. The implementation of appropriate procedures was thus intended to ensure the efficiency of decision-making processes. These solutions were, and still are, most often introduced in the form of provisions in the articles of association or regulations of company bodies.
Recently, this approach has broadened considerably. Indeed, when implementing ESG in their organisations, companies are increasingly opting for the formal adoption of rules and standards of conduct, including via:
- Regulations outlining the company’s corporate culture and values e.g. in the form of a code of ethics
- Solutions to protect whistleblowers
- Anti-corruption policies on disclosure and prevention of irregularities
- Policies on political influence activities, including lobbying
- Animal welfare solutions
- Customer and supplier relationship management policies
Companies will report on ESG issues, including corporate governance
The implementation of corporate governance within the ESG framework will undoubtedly require the attention of companies in the near future.
Although the legislation will only require a subset of companies to report on the issues identified in the ESRS,[1] a number of obligations will also fall on other market participants.
Indeed, large companies will have to include information from (and impose requirements on) their counterparts in the so-called ‘value chain’, leading to an indirect burden on those entities that are not explicitly regulated.
Importantly, an increasing number of consumers and business partners are already looking at companies’ ESG activities when deciding whether to engage with them. Due diligence in this area can therefore have a significant impact on a company’s image and performance.
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[1] European Sustainability Reporting Standards (ESRS), which is annexed to Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards
