G in ESG - corporate governance and sustainability

Key information:

• The acronym ESG refers to environmental factors, corporate social responsibility and corporate governance, the purpose of which is to ensure that a company is managed responsibly, transparently and in line with the interests of all stakeholders,
• ESG reporting regulations come into effect as early as this year. While they apply to large public interest entities (e.g. banks) for now, small and medium-sized companies will be required to report ESG data as early as 2027,
• Corporate governance issues include the qualifications, role and tenure of the board of directors, as well as diversity, ethical behavior, communication with stakeholders and transparent pay,
• Considering ESG strategy can be good for investor relations, branding and better workplace conditions, resulting in better financial performance,
• Even if your company is not yet required to report ESG data, it is worth introducing it along with elements of corporate governance principles. This will give you a competitive advantage.

Details below!

Already this year, large companies covered NFRD (The Non-Financial Reporting Directive), will be covered by the obligation to ESG reporting, and every year it will include more and more companies. ESG reports not only describe companies' social responsibility and environmental impact, but also corporate governance activities, the "G" in ESG.

Would you like to prepare for the upcoming changes and learn more about corporate governance rules? Or maybe you want to take care of relations with all stakeholders or develop an advantage for your company right now? You will find all the necessary information in our article.

What is ESG?

Abbreviation ESG derived from the English Environmental, Social, Governance and refers to the company's environmental, social responsibility and corporate governance activities. These are standards that aim to measure a company's impact on the mentioned factors and emphasize the importance of including more than just financial results in reports.

G for corporate governance

G for Governance, which just means corporate management or governance, is a system of controls and procedures aimed at proper and transparent management of a company. Corporate governance defines the governance structure, shareholder rights and ethical standards, which underpins the company's operations, making it a key element driving all ESG initiatives.

Corporate governance is the basis for building relationships with employees, investors, or management. Maintaining a transparent system is key to building relationships, and can be a competitive advantage, especially for suppliers. Companies that do not adhere to corporate governance principles may be excluded from supply chains or other collaborations with contractors that pay attention to sustainable management issues and are willing to comply with all ESG principles. Such consequences can have a negative impact on financial performance, which directly affects credit ratings and access to capital.

Maintaining high-quality corporate governance allows the company to improve its reputation, better manage risks, increase efficiency and even build relationships with a special group of customers, as well as branding. The quality of corporate governance is evidenced by factors such as professional management, the structure of the board of directors and management, and well-organized governance systems and processes.

What should a Corporate Governance report contain?

Regulations specify a range of information that a company should disclose. According to EU regulations and standards, the corporate governance report includes:

• Information about the board of directors such as experience, qualifications, roles (divided into executive and non-executive), competence and length of term,
• Management compensation policy,
• Percentage of independent management and supervisory board members,
• Percentage of women on management and board of directors,
• Information on risk management and internal control practices,
• Description of involvement and rights of shareholders, including minority shareholders

In addition, in addition to applicable laws and regulations, Companies listed on the WSE are required to comply with "Good Practices of Companies on the WSE 2021„. It is a set of rules designed to promote effective management, respect for shareholder rights and transparent communication with the market. According to the "comply or explain" principle, companies must comply with regulations relating to: information policy and communication with investors, management and board of directors, internal systems and functions, general meeting and shareholder relations, conflict and related party transactions, and remuneration.

By considering the above elements, companies can provide stakeholders with a clear overview of how corporate governance principles are integrated into their strategy, enhancing trust among investors, customers and other stakeholders.

Corporate governance best practices?

The concept of corporate governance may seem incomprehensible at first, for this reason we have prepared some practices to help you apply corporate governance in accordance with current recommendations.

• Provide regular updates on the company's activities, and clearly define the roles and responsibilities of management and employees

The first element to put in place is transparency in the company's operations and a clear definition of the responsibilities of the various roles. Companies should regularly inform stakeholders about their activities, difficulties, risks or financial results. Publication of reports describing ESG factors helps build trust. It is also worth adding that all reporting procedures and policies should be transparent to make them as easy to read as possible. Within the organizational structure, roles and responsibilities should be clearly defined, ensuring that decisions are made in an informed manner.

• Implementation of ESG management in the risk management process

Another good practice is Implementation of ESG management in the risk management process. This includes among others. risks associated with climate change, shortages in natural resources. This allows companies to better prepare for potential challenges and minimize negative impacts.

• Responsible management of supply chains

Another standard for governance is responsible supply chain management. Companies should not only pay attention to ESG factors, but also choose suppliers who also comply with them. The introduction of a supplier evaluation and monitoring policy is necessary to minimize the risk of suppliers engaging in unethical practices, which can lead to image problems and negatively affect sustainability ratings.

• Introduce gender and ethnic diversity in the boardroom

The next indicator on corporate governance is diversity on the board, as measured by the percentage of women and minorities. Diverse management can bring different perspectives, which promotes better decision-making and innovation.

• Implement a transparent remuneration policy

Remuneration policies are also relevant to managing ESG aspects. Executive salaries should be disclosed and linked to performance or progress in introducing and managing ESG aspects, such transparency will improve working conditions and is a good motivator.

• Giving rights and protecting minority shareholders

The assessment of governance principles is also influenced by the protection of minority shareholders. Companies should provide mechanisms that allow these shareholders to participate in key decisions. Ensuring equal voting rights promotes transparency and democratic governance.

• Create a code of ethical behavior and conduct regular training on it

In order to facilitate the introduction of corporate governance and allow employees to understand and assimilate it more quickly, it is good practice to have a code of ethical behavior, as well as regular training. This will help build and strengthen an organizational culture based on integrity.

Benefits of implementing the ESG report

There are many benefits to reporting ESG data and taking the steps we described earlier. First of all, it has a big impact on stakeholder confidence. On the basis of ESG indexes, at least in the United States, one can see their continuous growth. This means that companies meeting these criteria are becoming increasingly popular among investors, and they are actually paying attention to them.

However, ESG reports can not only improve investor relations, but also build ties with customers, local communities, and employees who appreciate working in a transparent and fair environment. In turn, creating an organizational culture around ESG activities can foster a certain sense of belonging among employees. Companies that care about their employees and promote the values of diversity, equality and inclusiveness have lower employee turnover and higher levels of job satisfaction. It is also an undeniable fact that young people are increasingly paying attention to social responsibility issues. Companies that adhere to these principles are more attractive to young talent and can attract perspective people with great skills, which of course affects the company's productivity and innovation.

Another advantage of running this type of report is cost optimization. They allow companies to better monitor resource consumption and analyze it for wastage. Reducing water, material or energy consumption on a large scale leads to significant savings. Insights from this kind of data can also help in designing a circular economy. In the face of increasingly expensive CO2 emission certificates and increasingly difficult availability of raw materials, such measures not only positively impact a company's bottom line, but also serve society and the world at large.

Non-financial reports also help effectively manage ESG risks, such as climate change and social issues. Monitoring one's operations, while also investigating suppliers, helps ensure that a company complies with all laws and standards, and can protect the company from reputational damage.

For management, ESG data reporting is also not insignificant. Such analyses are a tool for monitoring compliance with ESG requirements, so that not only can the company be analyzed in this regard, but also penalties for violations can be avoided. In addition, they can help determine the new strategic plan, which will take into account elements of the ESG strategy.

Given these benefits, it can be concluded that good ESG management practices can become a source of competitive advantage. Companies adhering to these standards are seen as innovative. In addition, consumer awareness continues to grow, and some customer groups may prefer companies that adhere to new expectations.

Corporate governance a source of competitive advantage

In today's world, corporate governance plays a key role in adapting companies to new challenges and expectations, and is the basis for carrying out any changes related to sustainable development. The rise of ESG indicates that the future belongs to companies that adapt to new regulations and ensure sustainability. Regardless of whether your company already becomes subject to ESG reporting, the introduction of corporate governance principles is always beneficial. Such a change will not only have an impact on investor relations, but also on the atmosphere in the workplace and affect higher employee motivation. In addition, your company will be seen as innovative and ready for what the future holds.

If you would like to gain a competitive advantage now and learn what you can still change towards ESG management, contact us!