Governance appears last in ESG. But it should not be least.
The point of triptychs is that each of their three panels is integral to the whole. Like a pyramid in Egypt, the artworks would fail to stand up were one of their elements poorly developed, underpowered, or omitted. Yet there is a risk that exactly that could happen with ESG. The G – governance – is less talked about, lower profile and perhaps less instinctively interesting than its counterparts, Environmental and Social.
It is easy to see why. Environmental and Social speak to the two greatest challenges of our time. Climate change is at the heart of humankind’s efforts to continue to thrive on this planet. Enduring racial and gender inequality, gender-based violence and poor social mobility threaten not only the viability of businesses and communities, but the cohesion of whole societies. Political, business and community leaders worldwide are aware of the potential remedies that can reverse these ills and restore our commercial and societal fabric. Yet this knowledge is useless without the effective governance required to deploy them.
The G of ESG is too often swathed in bureaucratese: the dry jargon of regulation, compliance and shareholder returns. Governance has a mundane image. Yet, at Duke Corporate Education’s recent Davos of Human Capital event, it was Chris Maroleng who outlined not only why G is crucial to the delivery of E and S, but why it holds the key to the success of the entire triad. Maroleng, global advisor and South African Development Community (SADC) executive director at Good Governance Africa, said despite the muddying of meaning, Governance has a clear, visceral, and compelling definition. “It’s simple,” he said. “It’s about who gets what, when and how. It’s about the authoritative allocation of resources.”
Frequently, the governance of organizations is driven by stakeholders looking to maximize short-term financial gains, with an attendant hope that environmental and social goods might ensue. Sometimes they do. Too often they don’t. And even when they do occur, Governance’s initial commercial focus can militate against their maximization. The incremental changes born of governance programs that lack an explicit social and environmental focus are unlikely to be potent enough to combat the massive climatic and humanitarian challenges organizations and governments face.
Effective governance seeks instead to treat commercial, environmental, and social benefits as they are – connected parts of a single whole. “From an ESG perspective, the governance process should become more transparent and more accountable,” said Maroleng. “It should consider aspects around social and economic justice – and allow for the establishment of real shared value.”
The G should be reframed as Maroleng suggests – as the key to real shared value in all aspects of business: commercial, social and environmental. Far from being the musty preserve of internal management, it is core to the success of businesses looking to integrate positively with their local environments and communities. Organizations that fail to do so will founder.
The understanding of the E and S of ESG – and their importance to organizational success – is slowly increasing. The danger is the final part of the triptych is sidelined or forgotten. The G of ESG is not ancillary. It is a fundamental part of the piece, without which the creation of real shared value is impossible.
Sharmla Chetty is chief executive of Duke Corporate Education.