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G in ESG: No company is 'too big to fail' on governance

G in ESG: No company is 'too big to fail' on governance

Whether it is diverse representation on boards, strategic considerations, political lobbying or cyber risk management, governance plays an important role in how businesses are being run.

Good governance can vary by region, but it is core to all good businesses and tends to be rated quite heavily by ratings agencies and asset managers in bespoke approaches, said Diana Rose, head of ESG research at business consultancy Insig AI, on the latest edition of the FTAdviser In Focus podcast, in partnership with Wisdom Tree.

"I see it as a structure from top leadership down to the day to day running and operational level of a business," she said.

"There are lots of frameworks out there that try to capture what this means to investors and these are all structured a bit differently. That's partly due to the inter-relationships with other ESG factors, in particularly social ones.

"At Insig we group the G into six issues: organisational purpose; strategic direction, which considers opportunities and long-term value creation; board and executive management; risk management, including cyber; stakeholder and supply chain engagement; and then ethics, which includes tax, anti-corruption and bribery, and lobbying."

Also speaking on the podcast was Lidia Treiber, ESG research director at Wisdom Tree, who said: "When we think about a sustainable business model governance is certainly at the heart of that."

Done well, corporate governance could mean "long-term better performance for a company and for those investors that buy these companies within their investment portfolios," she said.

But done badly, it could have strong implications for the financials of a company and for those who invest in it.

Treiber said: "When we think about a lack of good corporate governance we think about the recent issues with We Work, how there has been a lot of scrutiny for their lack of leadership accountability and oversight and there [were] clearly a lot of conflicts of interest.

"It's interesting because We Work has this dominance in this co-working field and a lot of times investors fall into this trap of thinking companies, they are too big to fail in these very important areas like corporate governance, and the reality is that there isn't really a company that is too big to fail."

If you want to hear more about how investment providers screen for governance, the impact of the Ukraine war on governance, and how advisers should approach governance with their clients, click on the link above.