While environmental, social, and governance (ESG) issues have gained significant attention in the executive arena, not all three elements receive equal consideration. Attention has primarily been given to environmental performance and certain social indicators, such as diversity, inclusion, and modern slavery, while corporate governance - the "G" in ESG - has received fairly little attention.
However, this lack of focus on corporate governance is unjust, as effective governance is crucial for long-term ESG success, ensuring that ESG considerations are integrated into the organization's strategy, processes, and decision-making. Conversely, poor corporate governance has been at the root of many corporate scandals.
At KPMG, we recognize that many organizations struggle to apply fundamental principles of corporate governance in a comprehensive and integrated manner. Furthermore, some organizations' current governance structure is primarily aligned with traditional financial reporting requirements, ignoring ESG responsibilities. Given that good governance is a crucial foundation for successful ESG strategy and meeting related legal requirements, we feel it is our duty to highlight the importance of the "G" element.
In this article, we will first delve into the definition of corporate governance, the key elements of governance, and its importance within the ESG framework. Secondly, we will outline our perspective on how organizations can successfully address the "G" component.
Governance: What is it exactly?
Although corporate governance is not an entirely new topic and pre-dates environmental and social risks as a corporate priority, it is important to begin by examining some of its definitions to gain some basic understanding:
- “Corporate governance guides the course of the organization, its external and internal relationships, and the rules, processes and practices needed to achieve its purpose” (ISO 31000:2018, Risk Management)
- “Corporate governance is an integrated approach encompassing the processes, standards, rules, and practices an organization follows when interacting with its stakeholders (both internally and externally)” (KPMG Belgium)
Given the definitions mentioned, it is evident that a well-defined corporate governance system is crucial for ensuring that an organization acts in the best interests of its stakeholders and accomplishes its long-term strategy, including ESG goals.
Furthermore, following elements are core elements of corporate governance within ESG:
Anti-corruption and integrity
Risk & crisis management
Fair competitive practices
Supply and value chain management
What is the importance of governance within ESG?
Corporate governance is not only one of the three elements of the ESG acronym, but it is also considered a critical component for the successful implementation of ESG.
An effective and integrated corporate governance system is crucial to ensuring that ESG efforts result in a clear strategy, concrete action, and systemic change. Specifically, it ensures that ESG considerations are integrated into the organization's daily processes and promotes a more systemic approach to ESG thinking.
In addition, organizations that prioritize good governance and consider governance risks and opportunities in decision-making are less likely to experience organizational scandals and can better capitalize on business opportunities over time.
Finally, a culture of responsible corporate governance that incorporates ESG and other business disruptions will generate trust with employees, investors, and other stakeholders.
Corporate governance within the Corporate Sustainability Reporting Directive (CSRD)
With the adoption of the CSRD by the European Council on 28 November 2022, large companies are required to report on their sustainability matters from FY2025 onwards. This means that, next to environmental and social factors, companies will need to disclose their corporate governance practices, including:
1. the main features of the companies’ internal control and risk management systems;
2. the role of the companies’ administrative bodies and their composition, expertise;
3. business ethics and corporate culture, including anti-bribery, the protection of whistleblowers and animal welfare; and
4. the management and quality of relationships with customers, suppliers and communities affected by the activities of the company.
How can KPMG help?
At KPMG, we believe that corporate governance is a crucial component for organizations to effectively implement their ESG strategy and meet related requirements. Rather than treating ESG as a separate issue within the organization through uncoordinated compliance programs or separate internal control frameworks, organizations should approach ESG-related risks and opportunities holistically and pragmatically, alongside all other risks and opportunities throughout the organization. This holistic approach to corporate governance, which we call integrated governance, results in a higher level of organizational confidence regarding ESG and avoids inefficiencies within the organization.
In order to help organizations understanding and managing their risks and opportunities on an integrated manner and in line with their risk appetite and strategy, we have developed a generic organizational ESG Integrated Governance Model based on the '9 Levers of Value KPMG Model', which is a proven methodology to help organizations understanding and managing their risks and opportunities on an integrated manner, and in line with their risk appetite and strategy. This ESG Integrated Governance Model provides a comprehensive framework and can easily be tailored upon the organization’s specific needs in order to enhance the existing GRC framework implemented and optimally integrate specific ESG related risk management processes, ESG controls and assurance structures and processes, or ESG compliance programs.
Finally, KPMG Belgium is well-equipped to support your organization with the specific "G" related topics mentioned in the table above. This includes:
- Perform specific internal audits on ESG related topics
- Embed both strategic & operational ESG risks in the existing risk management framework
- Advise on the Internal Controls Framework over non-financial (ESG) Reporting
- Perform an integrity audit / assessment or provide ethics & integrity trainings
- Evaluate board composition and performance including or specific on ESG aspects
- Assess how ESG is embedded in organization’s culture and can be optimized
- Carry-out a CSRD / ESRS Governance Assessment
- Help create formalized ESG process descriptions, policies & procedures, and charters
- Perform anti-bribery and corruption risk assessments
- Assist in development of governance related reporting disclosures
If you want to learn more about governance within ESG, please feel free to download the one-pager document that we have attached below. You can also reach out to us via email if you have any questions or feedback.
Author: Michiel Thijs, Senior Advisor
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