Governance is the most neglected element of ESG. There are, in fact, two definitions of governance, one restricted the other more expansive. The restricted version sees governance in terms of company behaviour and specifically a company operating with integrity and transparency – both inwardly towards employees and outwardly towards customers. The more expansive version of governance focuses on the activity of governance itself and whilst it embraces the restricted version, it expands to include the governance of all human activity (so, for example, this would include governance [regulation] of company behaviour, environmental safeguards, justice and strong public institutions, public safety and protection from harms, plus the role and activity of government itself). Although originally conceived in its narrower version, the definition of the G in ESG that seems to be growing in importance and acceptance is the more expansive of the two.
This second definition, however, poses particular problems for government. Setting aside, for the present (although this is an important issue that deserves proper airing) the, all too often, poor levels of governance (high levels of corruption) within governments, it is worth considering the actions of governments in carrying out their governance functions on behalf of wider society and, in particular, to highlight the structural problem(s) facing western democracies in acting genuinely in the public interest.
Let’s take two brief examples first: one from the investment community and the other from my employer, Bedford Row Capital.
Many of the big institutional investment houses are long-established businesses, with some having been in existence for 300 years. Businesses such as these take the longer view. They intend to be around for the next 100 or 300 years. For such businesses long-term sustainability matters and they recognise and act upon the interdependence of E, S and G. Although still far from universal, this is why many have embraced ESG criteria in their internal operations and investment decision-making. Good stewardship is endemic to longevity in business.
Bedford Row Capital, however, a specialist debt structuring business focused on SMEs, typically conducts deals in the three-to-five-year longevity window – a much shorter timeframe than the institutional investor. Despite this, sustainability and engaging with clients with demonstrably positive ESG credentials are central to our business practices. We take this approach because: a) we fully recognise and support the financial, material and wider benefits to be gained from ESG promoting clients and b) we want to attract institutional investors to our issuances.
So why, then, is the approach briefly outlined above so problematic for democratic governments? In practice there are a number of related problems.
Democratic governments have short lifespans – generally facing elections every four or five years. Many of the functions of government require long-term solutions (that may cost the government legitimacy in the short-term). Long-term solutions are structurally incompatible with short-term lifespans.
Democratic governments are generally self-serving, at least to the extent that they seek re-election. Many of the requirements of government that serve the interest of the population, e.g. environmental protection, justice and public safety, do not serve the interests of governments in their efforts to gain re-election.
There is a concept known as ‘The Overton Window’. Within this window lie the range of government policies that are deemed to be currently acceptable to the mainstream population. This, of course, means that there are policies which are too costly, politically, to be acceptable (where these costs can be defined in terms of finance and social policy) despite them being of obvious public benefit.
To be pursued successfully some policies require action by more than one government. Whilst Governments do co-operate: a) inter-governmental co-operation has its limits and b) such co-operation is not always in the public interest – at least partly because the public interest is not always unitary (there are competing public interests).
These structural obstacles to the functioning of governments in a manner that exemplifies good governance are serious inhibitors to the achievement of wider ESG objectives. It is perhaps paradoxical that the only way (at least the only way that I can see) for Governments to overcome, or at least mitigate, these obstacles is for Governments or, more precisely, Government Ministers to eschew corruption, demonstrate more integrity and honesty in their behaviour and decision-making, exhibit greater levels of competence and promote the highest standards of public life, in short: through more and better governance.