When good G reduces your risks in E and S

The whole point of ESG investing is to identify and monitor risks that are not priced in the stock market but that could become material for the financial success of a company. This also means that the three dimensions of ESG are not independent. A company with good governance is likely to have better risk oversight and thus lower risks in day-to-day operations.

This is what a new study was designed to examine and indeed verified for a sample of 249 publicly traded companies in 29 countries. The researcher got access to the data collected by insurance giant Aon with its Risk Maturity Index which is essentially a long questionnaire of the internal risks and governance practices of companies.

They looked at the different components of governance and risk oversight of environmental and social risks within an organisation. They also controlled for other factors such as gender diversity on the board of directors, size of the board, tenure of the board, the financial expertise of the director, etc. In the end, four factors play a significant role for a company to implement an effective strategy on environmental and social risk: gender diversity, the existence of a dedicated ESG committee on the board, the number of directors on the board, and – most importantly – the quality of governance on environmental and social risks. Good governance begets a good strategy on how to deal with environmental and social risks.

And the strategy together with good governance conspires to better outcomes and lower risks in the environmental and social dimensions, as the study shows. In other words, without good governance, it is that much harder for a company to improve its environmental and social outcomes and reduce risks overall, not just financial risks. Good governance really is the foundation of everything a company does.