Is 'Governance' about to get more focus when it comes to all things ESG?
In November 2022 the EU Parliament adopted the Corporate Sustainability Reporting Directive (CSRD) which will be adopted into EU Member national law over the next 18-months. Whilst not directly applicable in the UK, it will affect relevant businesses who meet the criteria in terms of size, revenue and operations (or head offices) located in EU member states.
The regulatory requirements only apply to businesses which meet the criteria, in terms of employee numbers, location, stock listings and turnover. The CSRD will however undoubtedly impact other businesses in a similar way as we have seen with other mandated requirements; for example, in relation to climate, supply chain due diligence, modern slavery and pay gap reporting. Expectations related to legislative demands are often incorporated into supplier standards so that requirements get pushed into the supply chain. In this way UK businesses that trade within the EU may indirectly be asked to comply with criteria reflected in the CSRD.
The Directive itself will create new, detailed sustainability reporting requirements and will significantly expand the number of EU and non-EU companies subject to the EU sustainability reporting framework. The required disclosures will go beyond environmental and climate change reporting to include social and governance matters (for example, respect for employee and human rights, anti-corruption and bribery, corporate governance and diversity and inclusion).
So, what does it take to promote good governance?
To date, the 'G' seems to have had less prominence, perhaps as it has been seen as more about compliance, or that historically CSR was focused on community and more recently that climate has taken the limelight, in respect of the environment. However, it is clear that good governance is fundamental to effectively enabling the social and the environmental dimensions of ESG, as well as being a bedrock of responsible business and investments.
Good governance must be reflected in the organisational culture. It requires leadership and the role-modelling of values, behaviours and respect of the governance framework.
Key steps in building an effective corporate governance strategy include: understanding legislative and stakeholder requirements and what good looks like; engaging with the Board and the leadership; setting up the relevant structures - committees, policies, audit schedules, codes of conduct, remuneration and reporting; defining accountabilities; engaging with shareholders and wider stakeholders; monitoring effectiveness and making disclosures.
Whilst Company Secretariat, General Council, Risk and Audit Functions are very much in the fabric of a governance framework, quite simply everyone has a role to play, in terms of behaviours and respecting Codes of Conduct.