This article is a sequel to the earlier one published on Monday, 27 January,2023 edition of this column. In the previous edition, I sought your attention with a discussion on the key indicators business leaders must consider in their business sustainability strategies by focusing on the environmental, social, and governance (ESG) principles. To broaden your horizon with the finest details of the issues embedded in each of the principles, today’s feature invites you to another thoughtful discussion on the key elements which define sustainability governance.
In my reasoning with Garth Watson, the Co-founder of Libryo, a London based regtech company, “sustainability governance is the governance of organizations which is both lawful and which promotes a good life for all, now and far into the future.” The “lawful” part of the definition to my mind means that businesses which aim at sustainability in the context of environmental, social, and governance (ESG) principles should in the first place have a legal existence or operate within a legal framework of rules and regulations.
The legal existence means that businesses must be registered with relevant authorities like the Registrar General or the sector regulator in the country. Thus, registering a business helps to identify its main purpose, the industry in which it operates and how to align its values, products or services with the underlying principles of environmental, social, and governance (ESG) since they are the building blocks and pillars which hold them firmly for the presence good life and far into the future for all generations. In effect, existing as a legal entity helps a company to implement its sustainability strategies across the business by following a defined structure of rules and regulations. It also enables businesses to strengthen their relations with external stakeholders and ensure overall accountability.
Responsible Leadership
One of the key factors business owners must aver their minds to with regard to sustainability governance is responsible leadership. You will agree with me that the current business environment has experienced the effects of COVID-19 and the Russia/Ukraine war. The business environment is in fact experiencing new and emerging threats and behooves business leaders to act more responsibly. This is to say that responsible business leaders should be able to deliver organizational performance, whilst acting sustainably without compromising the underlying principles of environmental, social, and governance (ESG).
Responsible leadership requires business leaders to ensure that their decisions are based on the long-term sustainability of society rather than satisfying their immediate priorities at the expense of future gains. By extension, being responsible means that business leaders must consider the societal and moral implications of their decisions. As part of their strategies for achieving financial objectives, it is also imperative for businesses to set the tone from top leadership and involve line managers to practise responsible leadership within their units of operations.
In line with strategies, business leaders need to implement key metrics which will help them to measure the positive impact of responsible decisions. It is worth re-emphasizing the fact that environmental, social, and governance (ESG) challenges differ from one business to another due to industries’ peculiar challenges or goals. Therefore, responsible leadership requires business leaders to set their key metrics or deliverables by considering those peculiarities. It is so revealing that many key decision-makers are not equipped with the requisite knowledge of the subject matter to enable them to develop their environmental, social, and governance (ESG) priorities with effective monitoring and evaluations tools. It is in this vein that I suggest they seek technical advice to equip them with the relevant skills to deliver on their mandate.
Corporate Governance
It is common knowledge that identifiable businesses in a country do not operate in a vacuum. As I said early on, they must have their legal existence to define their scope of operation and how they should be governed. In this regard, corporate governance further defines the system of rules within which your business should operate, the practices and principles of your industry and how it should be controlled in its relationship with your customers, employees, suppliers, financiers, government and your community. Since businesses operate in different sectors of the economy, their practices and depth of exposure to environmental, social and governance (ESG) risks are equally not the same. As a result, there cannot be one approach (one-size-fits-all) to corporate governance which may be right for all companies. Accordingly, business leaders must have their corporate governance blueprints developed by considering their specific industry dynamics and circumstances. This will help them set their priorities and the responsibilities of stakeholders towards achieving their sustainability goals. Irrespective of any differences in form or substance which could be due to business type, an effective corporate governance structures must exist so that in making sustainability decisions, businesses must consider all stakeholders’ interests.
Internal Controls
Sustainability Governance also requires companies to integrate effective internal controls into their business processes to provide reasonable assurance to all stakeholders that the company is operating within the ESG framework. Thus, businesses need to have policies which define their Environmental and Social Governance objectives, level of risks, and then look at both the design and the operational effectiveness of their systems to prevent, detect and address emerging risks. The rationale behind broadening the scope of internal controls to cater for ESG principles is to ensure companies operate within legal and ethical requirements so that they do not suffer adverse consequences of emerging risks. Companies which have deficiencies in respect of integrating the ESG principles into their internal controls need to do so or seek professional advice. This way, they will be more prepared to fit into the sustainability agenda.
Auditing
Sustainability Governance requires that companies must develop systems and processes to enable them to monitor and evaluate the environmental and social risks of their operations, products or services. The sustainability auditing process assesses companies’ preparedness and identify gaps regarding how they collect incident reports and manage potential environmental and social risks in their relationship with their stakeholders. The driving force behind sustainability auditing is to identify potential or emerging risks so they can be controlled proactively. Sustainability auditing standards and reporting are not cast in stone since complexities in companies’ risk exposures are different but the ISO 26000 guidelines demand from companies to report on their ESG principles with emphasis on the risks and impacts of their Corporate Social Responsibilities (CSR) activities. Indeed, Environmental, Social and Governance issues continue to influence public discourse and very important to investors, consumers and companies alike.
Original Source: B&FT