Over recent years, the environmental, social, and governance (ESG) concept has constantly been in the focus of endeavors and initiatives undertaken by business entities due to the pivotal role it plays in upholding corporate governance practices and providing insights into the efforts used by a business to achieve its ESG objectives.
Corporate Governance and ESG
Corporate governance is broadly defined as the set of principles, systems, and procedures that provide the best protection between the interests of an entity’s management, shareholders, and other stakeholders. Corporate governance provides a tool to rationalize the decision-making process within business entities.
On the other hand, the ESG framework is a comprehensive approach to assessing the ESG sustainability reporting and ethical impact of a business entity.
Such a framework is based on the correlation and interaction among environmental, social, and governance factors in evaluating the sustainability, impacts, and long-term viability of the business entity. It emphasizes the importance of sustainable and responsible business practices.
There is a mutually impactful relationship between ESG practices and corporate governance framework. ESG considerations affect the decisions made by the stakeholders of a business entity during business transactions.
Regulatory Requirements for ESG Integration in Kuwait
In the State of Kuwait, the Capital Markets Authority requires listed companies to integrate ESG into their corporate governance framework by ensuring that the ESG principles are adopted, documented, and implemented in corporate governance practices.
How can ESG be integrated into the corporate governance framework?
Integrating ESG into corporate governance can be attained by adopting a holistic approach to ESG and embedding sustainability in corporate strategies. This approach must be overseen by robust governance and a reputable Board of Directors that focuses on a new sustainability strategy driven by global trends across various industries.
There are some steps that should be taken to include the ESG in corporate governance. As an initial step towards ESG integration into the corporate governance framework, a clear ESG policy shall be developed and implemented, indicating corporates’ dedication and awareness of ESG concept and importance.
However, such a policy must be effective and established based on a solid ground that considers the concerns, inputs, and expectations of stakeholders. This approach emphasizes how important it is to engage stakeholders while developing the ESG policy to ensure the policy is aligned with the stakeholders’ considerations.
Furthermore, ESG integration into corporate governance needs to be a crucial part of top management, i.e., the board of directors’ insight and oversight, as the board of directors is responsible for steering the wheel of the company and overseeing its strategy, mission, vision, and goal.
To take ESG integration further, a link can be made between the executive management’s commitment to ESG and their compensation plans, depending on how much they are giving attention to ESG integration into governance.
ESG is extremely crucial in managing environmental, social, and governance risks through changing the corporate mentalities from being “Reactive” into “Proactive.” ESG risks include climate change impact, use of water, waste reduction and recycling, inclusion, equity and diversity, safety and human rights observation, corporate ethics and morals, and others.
Measuring corporate compliance with ESG considerations requires corporates to set key performance indicators. ESG’s KPIs include environmental metrics such as waste management, greenhouse gas emissions, and use of water and energy. Social KPIs revolve around labor practices, community impact, occupational health and safety, diversity, equity, and inclusion. When it comes to governance KPIs, matters such as transparency, risk management, AML/CFT policies, and executive management’s compensation plans must be mentioned.
ESG KPIs must be trackable. In this regard, KPIs can be tracked using software that uses a calculation engine. The software must be fed by ESG data in order to do the calculation and tracking functions. The outputs of such software will be reflected on a dashboard displaying charts, graphs, and infographics in one place. In that way, corporates will be able to measure their ESG performance towards ESG goals.
Role of ESG reporting in strengthening corporate governance
Through ESG reports, business entities would be able to enhance their governance frameworks by enhancing risk management, achieving regulatory compliance, and fortifying their internal control systems. On top of that, businesses would also be capable of enhancing their reputation and solidifying their sustainability in the long term. ESG reporting may benefit businesses by putting them ahead of other competitors.
In conclusion, ESG has become an integral part of the corporate governance framework, enabling businesses to maintain their commitment to achieving their ESG objectives and initiatives.