What is the “G” in ESG?
Elif Atak // 28.08.2024
The “G” in ESG (Environmental, Social, Governance) stands for Governance, which deeply addresses the corporate structure and operations of companies. Governance includes elements such as accountability, trust, oversight, and control mechanisms. However, beyond these elements, strong corporate governance ensures that a company conducts its activities with integrity, transparency, and fairness. This requires companies to focus not only on their financial performance but also on their ethical values and responsibilities to society.
Traditionally, corporate governance covers areas such as board and senior management structures, anti-corruption policies, whistleblower policies, executive compensation, tax, and accounting practices. However, in today’s world, the governance aspect of ESG has become increasingly important for both investors and publicly traded companies. For instance, executive compensation linked to ESG performance metrics is becoming more prevalent. Similarly, the oversight of ESG policies and initiatives at the board level is gaining importance.
Investors scrutinize governance practices just as rigorously as environmental and social factors. Negative screens are used to exclude companies exposed to unacceptable risk levels, while positive screens are used to identify companies with strong and transparent governance practices. Therefore, companies with solid governance practices are less likely to engage in risky behaviors in the long run.
Strong corporate governance not only helps avoid risks but also ensures the long-term sustainability of companies. Corporate governance policies should reflect a company’s commitment to managing its activities ethically. This commitment not only protects the company’s reputation but also ensures that it fulfills its responsibilities to society and the environment.
Corporate governance is no longer just an internal requirement but also a criterion for investors. Investors prefer companies that adhere to transparent, fair, and ethical values, while these companies, in turn, secure their long-term success.
In conclusion, the “G” in ESG is more than just a letter; it is a cornerstone of corporate success. Through strong governance practices, companies not only meet legal obligations but also address societal expectations, paving the way for a sustainable future.
