What does G in ESG stand for?
G stands for governance, which essentially means the policies and practices—and ultimately the values—that guide how a corporation is operated and governed. Despite being a core component of ESG, corporate governance is often overlooked, and poor governance practices can create fertile conditions for corporate malfeasance, as seen in accounting scandals such as the Enron and WorldCom episodes in the early 2000s and, more recently, the Volkswagen emissions scandal of 2015.1
What does governance entail?
Governance may be understood as having two key components: corporate governance and corporate behavior. The governance piece involves the makeup of a company’s board, ownership, and management teams as well as its accounting, auditing, and corporate disclosure practices. Good governance goes beyond seeking diversity on the board in terms of gender, race, and background. It also involves ensuring that there is a good mix of people who are independent board members from outside the company and can provide a fresh perspective and real oversight, mixed with insiders who are more knowledgeable about the company. Through their oversight roles, independent directors and audit committees can also serve as gatekeepers and potentially reduce the risk of fraudulent accounting practices.
Under the corporate behavior umbrella, there’s the company’s business ethics, transparency, and regulatory compliance as well as the presence of any anticompetitive practices, corruption, or instability.
|Key elements of the governance pillar|
How can good governance enhance a company?
Good governance can:
- Affect the bottom line: Just as good governance is key for a company to pursue its goals and objectives, weak governance can have a big impact on a company’s financial health. According to a 2019 Diligent report,2 recent poor governance decisions at 14 companies cost shareholders a total of $490 billion in value a year after the governance crises occurred. It’s also possible that investors may feel less inclined to associate themselves with or invest in stock or bonds issued by a company known to have poor governance practices.
- Sustainability-oriented governance leads to better opportunities for companies to put sustainability practices in place, which then can be incorporated into the values and rules of the organization. In this way, with good governance practices in place, a company may protect long-term investor, social, and environmental interests with long-term operational efficiency.
- Create good faith in the market: Addressing and actively working on high-profile governance issues such as gender diversity and equity shows investors that the company and its board are listening to societal cues. In recent years, institutional shareholders have increasingly been pushing for greater representation of women on boards and in executive ranks, and many companies have begun emphasizing the potential financial benefits of more diverse and inclusive workplaces. These actions not only potentially benefit customers and employees but may also add to the growth of communities.
- Create a strong brand: As more millennials become employees, consumers, and investors, their growing influence is likely to put companies under greater pressure to become good corporate actors if they wish to win this young generation’s loyalty. A 2018 survey by Deloitte found that far more millennials believe business leaders are making a positive impact on the world than government or religious leaders.3 By creating a strong brand that embraces good governance, companies may be able to gain the loyalty of millennials as well as those from other generations who place a high priority on ethical corporate behavior. This is also relevant in terms of attracting the best talent in the market, as more employees seek roles in companies with strong corporate values.
The growing importance of good governance
Recent headlines about corporate governance among oil and gas majors and the growing attention paid to sustainability and ESG factors in general mean that publicly traded companies will continue to face pressure to expand their objectives beyond profits and shareholder interests and embrace a broader set of goals and stakeholders. Just as firms have the incentive to make products and services that people want to buy, they’re equally incented to approach governance and corporate practices generally in ways that make customers and clients comfortable doing business with them.
1 “Volkswagen’s ‘uniquely awful’ governance at fault in emissions scandal,” cnbc.com, 10/4/15. [LAL1] 2 “A case for modern governance: The high cost of governance deficits,” Diligent Institute, 5/21/19. 3 “2018 Deloitte Millennial Survey,” Deloitte, 2018.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional
Australia: Manulife Investment Management Timberland and Agriculture (Australasia) Pty Ltd, Manulife Investment Management (Hong Kong) Limited. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Manulife Investment Management Timberland and Agriculture Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.