Environmental, Social and Governance (ESG) is now at the forefront of the Australian landscape, with it becoming a vital indicator for assessing a company’s overall performance. It focuses on non-financial criteria and goes beyond shareholder returns to consider stakeholders other than the business owner. A key pillar in ESG is “Governance”.

What does Governance encompass?

As described by the Australian National Audit Office, Corporate Governance is about formalising, clarifying and making clear, transparent and consistent, the decision-making processes in the organisation. Those decisions contribute to the organisation’s overall efficiency and effectiveness. Effective corporate governance promotes decision-making and appropriate delegation of accountability and responsibility both within and outside the business. Further, corporate governance practices should ensure that the diverse needs of stakeholders are properly balanced.

Governance elements within an organisation may include (but are not limited to) information on the board of director’s structure, diversity and skillset, executive remuneration, risk management practices, ethical standards and behaviours (including whistleblowing mechanisms), regulatory compliance and anti-corruption practices.

The importance of practicing good governance

When it comes to ESG, most organisations tend to focus on the “Environment” pillar. However, the value of good governance practices should not be underestimated.

Practicing good governance within businesses is key for a number of reasons such as:

  • Promoting transparency and accountability in decision making;
  • Fostering a positive culture of trust which also increases stakeholder confidence;
  • Facilitating compliance with internal and external legal and regulatory requirements;
  • Assisting in the management of risks faced to achieve strategic objectives;
  • Maintaining financial sustainability; and
  • Efficiencies gained through streamlining of processes and systems.

In the absence of a robust governance framework and principles, organisations may face significant risks, which if not addressed, can result in unwarranted breaches, fines / penalties, financial losses and reputational damage.

Practical areas for businesses to consider when implementing governance practices for ESG

  • Educating and involvement of Boards and Executives: through raising awareness and training, which will result in increased involvement and commitment on ESG matters, as well as alignment with strategic business goals.
  • Roles and Responsibilities: formally identifying responsible persons for implementing and overseeing ESG strategies, policies and activities.
  • Overseeing Working Groups / Committees: reviewing existing working groups / committees and determining whether ESG related responsibilities can be incorporated into those overseeing groups, or if a stand-alone ESG or Sustainability Working Group / Committee is required.
  • Risk Management: developing and implementing good risk management processes. This includes identifying, assessing, evaluating, treating, monitoring and reviewing ESG related risks. In doing so, organisations should also consider opportunities that may eventuate.
  • Monitoring and Reporting: establishing and reporting on ESG performance measures. These should be practical, measurable and realistic in order for the benefits to be realised.

ESG will continue to evolve within Australia, and organisations need to get started on their journey. As part of implementing good governance practices, businesses should take pragmatic and achievable steps, consider existing structures and processes, where relevant, rather than reinventing the wheel. The tone set at the top by the Board and Executive Management about governance should be clear and permeate throughout the organisation.

How can we help?

Accounting and finance professionals play an important role in providing assurance and advice on governance, ESG and sustainability matters more broadly. Get in touch with your local HLB Mann Judd contact to learn how we can assist you on your journey.

This article was co-authored by Kundai Mtsambiwa, Audit & Assurance Director at HLB Mann Judd Melbourne.