Behind ESG - Part 3: "G" - Governance

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August 2023

Three letters have long been widely known in the real estate industry: ESG. This abbreviation stands for Environmental, Social and Governance. Translated somewhat loosely into German, it refers to environmental and social aspects as well as issues of responsible corporate governance. Or, to put it another way, environmental and social sustainability.

In this blog post, we will take a closer look at the "G" for governance, probably the least known aspect of ESG. This relates exclusively to companies and, in particular, to their management. Principles and measures that fall under "G" for Governance in terms of sustainability are closely linked to "S" for Social and cannot always be sharply separated from the latter. An example: Do the fair treatment and payment of employees fall more under social or under governance? The question can hardly be answered unequivocally. Nevertheless, it is important to examine the individual aspects from different angles.

Focus on responsible corporate governance

The letter "G" in ESG stands for the English term "governance. In terms of sustainability, this refers to responsible corporate governance - in both an environmental and a social context. When it comes to assessing the ESG performance of a company with a view to ethical corporate governance, many social aspects come into play, as already mentioned. Many of these have already been covered in the previous blog post at "S" such as Social. These include respect for human dignity - also and especially in other countries and along the supply chain - compliance with human rights, occupational health and safety, and the avoidance of any discrimination.

Acting responsibly - internally and externally

Alongside fairness, transparency is one of the most important aspects with regard to responsible corporate governance. Naturally, this is primarily relevant for the top management of companies, but of course it always affects the entire structure of a company - and has an impact both internally and externally. Internal means it affects the company and all its activities. Externally, it affects all suppliers as well as society as a whole. Responsible and ethical corporate governance is important in order not to lose the trust of customers, business partners and investors and not to come into conflict with responsible regulatory authorities. Numerous headlines about scandals such as Wirecard illustrate the troubled waters into which companies had better not fall.

It is therefore important to ask whether laws and applicable regulations are being complied with - especially in countries with governments that may not be very stable or democratic, as well as with regard to supply chains - what values and guidelines a company lives by and how it communicates them, whether important control bodies such as supervisory boards are staffed in a diverse manner and thus whether effective measures can be taken against corruption, bribery and fraud.

Environment, social issues, corporate governance - everything is connected

As explained earlier, the different parts of ESG - environmental, social and ethical management - are always interlinked and cannot be clearly separated. And they shouldn't be, because taking action to improve ESG performance can change a company's operations from the ground up - by designing and establishing entirely new processes, for example, or by aligning internal and external objectives and setting new goals. When the various aspects of ESG are effectively intertwined, holistic solutions can be found and frameworks established that can make a company's operations faster, more efficient, and more cost-effective.

Thus, so-called corporate social responsibility also revolves around both environmental and social concerns. In other words, it is about responsible corporate management in more than just one respect. Part of this can be various measures towards more environmental friendliness or more social justice, as explained in the two previous blog posts. For companies, the external impact is always also of decisive importance: Those who can send the message to the outside world that they are doing business sustainably, and do so consistently and thus credibly, can thus prove that they are acting in line with the times and ideally set themselves apart from the competition.

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