Without G, there can be no ESG

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Are investors and insurers doing enough to address the "G" in "ESG"? The topic of sustainable governance was in the spotlight on Tuesday at Davos.

The question of how companies can make a positive impact on the world is a recurrent theme here, underscored by the COVID-19 pandemic.

What can investors, firms, and boards actually do to promote sustainable governance, accountability, and strong reporting processes? Good governance is the framework by which boards, investors and executives can measure and promote their environmental and social agenda, so without good governance, good practice in those areas is unlikely to flourish.

Getting the measurements right

As Jane Nelson, Director of the Corporate Responsibility Initiative at Harvard Kennedy School said, investors and other stakeholders need to be asking more from companies on the quality and quantity of analysis undertaken to identify environmental and social risks and opportunities.

It is no longer enough for companies simply to state they are taking action on environmental and social issues. They must demonstrate how governance processes mean good practice — and embed this in company culture.

The discussion also underpinned the important role investors now play in ESG. We heard from Johan H. Andresen, chair of the Council on Ethics at the Norwegian Pension Fund, who advises the fund on the viability of investments in listed companies.

Increasingly, ethically minded investors are interrogating not only human rights and anti-corruption measures, but also environmental and social performance. Nearly 80% of investors in a PWC survey last year said ESG factors were important in their decision making. Firms looking to participate in capital markets can pre-empt those conversations by implementing the right measures to start with.

ESG is not just an ethical consideration. It is also a financial one. Investors are increasingly looking for companies that are seen to be taking action, and allocate capital in companies with robust disclosure processes.

The effect of that has been to incentivise strong ESG performance across the board. As Inderpreet Sawhney, Chief Compliance Officer at Infosys, said: "A rising tide raises all boats."

With ESG performance becoming more integral to decision making, the need for a company to understand its impact on its risk profile is even more pressing.

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