Three letters have long been widely recognized in the real estate industry: ESG. This acronym stands for Environmental, Social, and Governance. Loosely translated, it refers to environmental and social aspects as well as issues of responsible corporate governance. Or, to put it another way, it’s about environmental and social sustainability.
In this blog post, we’ll take a closer look at the “G” for Governance—arguably the least well-known aspect of ESG. This aspect pertains exclusively to companies, and within them, primarily to senior management. Principles and measures related to sustainability that fall under “G” for Governance are closely linked to the “S” for Social and cannot always be clearly distinguished from it. For example: Do the fair treatment and compensation of employees fall more under “Social” or under “Governance”? It’s difficult to answer this question unequivocally. Nevertheless, it’s important to examine the individual aspects from different perspectives.
Focus on Responsible Corporate Governance
The letter “G” in ESG stands for “governance.” In the context of sustainability, this specifically refers to responsible corporate governance—both in ecological and social contexts. When it comes to assessing a company’s ESG performance with regard to ethical corporate governance, as already mentioned, a number of social aspects come into play. Many of these were already discussed in the previous blog post under “S” for Social. These include respect for human dignity—including, and especially, in other countries and throughout the supply chain—respect for human rights, occupational safety and health protection, and the prevention of all forms of discrimination.
Acting Responsibly—Both Internally and Externally
In addition to fairness, transparency is one of the most important aspects of responsible corporate governance. This is naturally most relevant to a company’s senior management, but of course always affects the entire structure of a company—and has an impact both internally and externally. Internally, this means it affects the company and all of its activities. Externally, it affects all suppliers as well as society as a whole. Responsible and ethical corporate governance is essential to maintaining the trust of customers, business partners, and investors and to avoiding conflicts with the relevant regulatory authorities. Numerous headlines about scandals like the Wirecard case illustrate the turbulent waters that companies would be wise to avoid.
That is why it is important to ask, for example, whether laws and applicable regulations—especially in countries with potentially unstable or non-democratic governments, as well as with regard to supply chains—are being complied with; what values and guidelines a company upholds and how it communicates them; and whether key oversight bodies, such as supervisory boards, have diverse membership, thereby enabling effective measures against corruption, bribery, and fraud.
Environment, Social Issues, Corporate Governance—It's All Connected
As explained previously, the individual components of ESG—environmental and social aspects, as well as ethical corporate governance—are always intertwined and cannot be clearly separated. Nor should they be, because measures aimed at improving ESG performance can fundamentally transform a company’s operations—for example, by designing and implementing entirely new processes, or by aligning internal objectives with external ones and setting new goals. When the individual aspects of ESG effectively interlock, holistic solutions can be found and frameworks established that can make a company’s operations faster, more efficient, and more cost-effective.
Similarly, so-called corporate social responsibility revolves around both environmental and social concerns. It is, therefore, about responsible corporate governance in more ways than one. This can include various measures—explained in the two previous blog posts—aimed at greater environmental sustainability or greater social justice. For companies, public perception is always of crucial importance: Those who can convey the message that they operate sustainably—and do so consistently and thus credibly—can demonstrate that they are acting in a manner consistent with the times and, ideally, set themselves apart from the competition.
