As the world looks towards recovery from the COVID-19 pandemic, companies are rethinking the foundations that their businesses are built on. We consider whether a strong ESG strategy is essential for creating and maintaining resilience. Trends show that corporate governance, the pillar that’s perhaps least talked about, is rising in importance.
- Governance scores and CSR (corporate social responsibility) scores show a steady growth across all regions of the world.
- Refinitiv analysis shows robust corporate governance is connected to better financial results and crisis resilience.
- Will an improvement in governance scores build more resilience post-COVID-19 and secure a sustainable increase in social and environmental scores?
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Refinitiv has released three new reports diving into the governance performance of different regions around the world: the Americas, EMEA, and Asia-Pacific. In this article, we’ll sum up the most important takeaways.
Impact of corporate governance
The three reports analyzed Refinitiv ESG data on 3,611 companies globally across five years.
Our goal was to explore current trends and assess the impact of governance on the environmental and social performance of corporations. We also set out to learn more about the connection between governance scores and financial performance.
The results indicate an overall increase in governance scores worldwide, causing optimism in these uncertain times.
We also found positive trends in CSR sustainability reporting scores and CSR strategy scores. When breaking the results down by economic and business sectors, the overall statistics were encouraging, even though there’s room for improvement in certain areas.
Rising governance scores
- Our analysis showed that over the past five years, governance scores increased by 14 percent globally, with EMEA and the Americas leading the way.
- Europe demonstrated an impressive growth of 17 percent, with countries like France, Sweden, and Germany coming out on top.
- Governance scores in the Americas saw a rise of 9.4 points. The United States won by a landslide, increasing its governance scores by 25 percent (i.e. nearly four times more than Brazil and Canada).
- The regions that showed the slowest growth in governance scores were Asia and Oceania, at 2.8 percent and 3.9 percent, respectively.
- Unfortunately, not all regions of the world saw an uptick. Africa lags behind all other regions, with a 1.3 percent decrease in its governance scores.
Increase in CSR sustainability reporting
- Over the course of five years, there has been a 13 percent increase in the proportion of companies providing sustainability reporting. Globally, 72.9 percent of the companies in our analysis report on CSR sustainability.
- China’s growth stands out, with a huge increase of 55.4 percent, resulting in a 90.5 percent reporting rate. There have also been major upticks in reporting in Hong Kong (i.e. a 47.6 percent increase) and Singapore (i.e. a 42.5 percent increase).
- In the Americas, only 55 percent of all companies have a CSR policy, which is considerably below the global average of nearly 73 percent.
Changes in CSR strategy scores
- Looking at all the companies in the analysis, we see a 24 percent increase in the global average CSR strategy score.
- In five years, CSR strategy scores in EMEA increased by 11.5 points on average.
- China and Hong Kong made leaps of 20 points, and Singapore increased its numbers by 18 points. India scored highest and Australia lowest, with nearly a 20-point gap between them.
- In the Americas, CSR strategy scores have increased by 6.5 percent, which is low compared to the global average of 24 percent. The U.S. leads the way in the region with a 8 percent growth.
Governance and financial resilience
Refinitiv analysts built portfolios of 50 securities with the highest governance scores and CSR reporting scores and compared their performance with the STOXX 600 in EMEA, S&P 500 in the Americas and ASX200 and Hang Seng index in Asia-Pacific.
The outcome? These portfolios consistently outperformed their peers in all three regions from 1 January 2015 to 8 August 2020.
Governance and its connection to other pillars
As a follow on from our global Governance & Sustainability Report, Professor Andreas Hoepner and Gabija Zdanceviciute carried out a regional analysis on the effects of governance, using regression models and machine learning algorithms.
They discovered that organizational transparency leads to conscious sustainability practices and decision-making, which, in its turn, has a positive impact on the environmental and social pillars:
- In the Americas, a published separate sustainability report leads to a near 59 percent increase in a company’s transparency on its stakeholder engagement. (Explanatory power in a single regression ADJ_R2: 44.80 percent.)
- In EMEA, a published sustainability report leads to a 37 percent increase in the likelihood of the company having a policy for reducing the use of natural resources and environmental impact of its supply chain. (Explanatory power in a single regression ADJ_R2: 35.18 percent.)
- In Asia Pacific, a published, separate sustainability report leads to a 58 percent increase in a company’s transparency on its stakeholder engagement. (Explanatory power in a single regression ADJ_R2: 34.10 percent.)
Building resilience after COVID-19
The results of these reports show that there’s an opportunity for businesses to build more resilience post-COVID-19 by dialing up their ESG efforts — and without governance signed into sustainability, a firm won’t be sustainable.
So where should companies weight their efforts?
Refinitiv approaches this differently per-ESG pillar, social and environmental pillars are weighted by sector — some companies will focus more on the social, others on the environmental aspects of ESG.
However, governance is sector agnostic and universally important. No matter what sector or industry a business operates in, strong governance is essential for strong sustainability and corporate resilience.