Governance is concerned with how a company is led and managed. It looks at its decision-making structure, how it distributes responsibilities internally, and also the systems, rules and practices it has in place. Governance reflects how the social and environmental aspects are monitored and managed and oversight of ESG matters lies with the board of directors.
Governance also focuses on the wider regulatory aspects – such as legislation and sector specific regulations. Many regulators across a range of sectors (such as financial and advertising standards) are holding companies to account and the Competition and Markets Authority is so concerned with greenwashing that it’s produced a Green Claims Code and has announced investigations into companies alleged to have made misleading sustainability claims. Various pieces of legislation – from reporting on the gender pay gap to publishing modern slavery and human trafficking statements – have been introduced to ensure minimum standards are met.
As we discussed in Parts 1 and 2, the ‘E’ and ‘S’ are becoming increasingly regulated areas and therefore businesses ought to to ensure compliance with requirements set externally by central government and regulators, as well as ensuring they have effective internal governance in place. Internal governance isn’t just about setting objectives and an ESG agenda: it’s also about measuring performance against agreed benchmarks to track progress and remain accountable.
Organisational and leadership structure and make-up is key here. Executives and senior leaders have pivotal roles to play in setting and implementing the ESG agenda. Indeed, under section 172(1) Companies Act 2006, directors must have regard to the impact of a company’s operations on their community and environment. The board of directors is accountable for the long-term success of a company and it’s crucial for good governance that a focus on environmental issues, sustainability and social aims is embedded into long-term decisions. That being said, from an employment perspective, a company’s HR department is also likely to be very influential in helping shape the company’s approach to ESG.
Many businesses have HR representation in the boardroom, which can influence strategy and culture. Some companies have dedicated sustainability directors or committees which have executive responsibility for delivering ESG objectives and improving sustainability in the organisation – members of the board who are tasked with ESG issues will be familiar with the requirement to exercise reasonable care and skill (section 174 Companies Act 2006) based on the knowledge, skill and experience a director actually has, and would be expected to have, which will be highly relevant to those leading on ESG matters. As well as ensuring the board has appropriate ESG knowledge and expertise, ensuring representation in terms of gender, race, neurodiversity (to name a few) is also important. Having a diverse board helps ensure that a range of opinions and experiences from people with different backgrounds are involved in strategic decision making, which leads to more robust, well-rounded decisions.
Parts 1 and 2 in this series of articles covered some of the key considerations when looking at how to enhance a company’s social and environmental credentials. As flagged previously, these are issues which need to be driven from the top of an organisation and filtered down. Some of the key governance issues to think about are:
As the final strand of ‘ESG’, good governance is a necessity for businesses to succeed and it should firmly be on the agenda for both HR and the board of directors. Employers who fully embed their ESG agenda into the organisation will benefit from a competitive advantage, with evidence pointing to improved profitability and reputation.
To discuss any of the issues raised in this series of articles, or for any other employment related queries, please do not hesitate to contact Bethan Jones.