Governance – no social distancing for corporates

The global economy is continuously changing. In today’s world, organisations are expected to pay closer attention to the environmental and social impact of what they do. Governance and corporate responsibility sit at the heart of this.   

A precise definition of ‘good’ governance remains elusive and will vary from one market to another. But we are seeing a number of trends that indicate a general direction of travel. An online seminar, “The evolving landscape of corporate governance and ESG” was recently hosted by Hume Brophy to help shed some light on what we can expect from policy makers, regulators, and market participants. 

The expectation is that greater scrutiny will be inevitable, and ongoing engagement will be key for businesses to remain relevant in the eyes of their key stakeholders. Evolving legislation amidst the ongoing public health, climate and inequality crises means that many companies face a need to communicate their values, evidence the sustainability of their business models and reassess how they interact with societies. 

 Here, we present a snapshot of the key points of discussion:  

An opportunity for the UK  

The growing importance of ESG is a challenge and opportunity for the UK Government – ensuring the country and the City of London remains a leading global financial centre and an attractive place to do business, while also being a driving force on issues such as corporate governance and sustainability.  

The likes of Share Action and other non-governmental organisations are also playing an increasingly visible role in this space. These groups put pressure on companies to report data in an efficient and transparent manner, allowing asset managers and allocators of capital to make more informed decisions on the sustainability of their investments. NGOs like these accelerate the process, bringing the conversation to the public sphere. 

Faced with such balancing act, we can expect the UK Government to try to focus its attention on those organisations with the greatest influence on businesses – auditors.  

Reshaping auditing to drive the ESG and governance agenda 

The UK auditing market is dominated by the ‘Big 4’ but politicians have come to realise the potential conflicts and risks of having the same organisation acting as both the auditor and the business consultant – especially where profits are primarily derived from consultancy work.  

Future regulation is likely to break this bubble and open the market for increased competition. An Independent Review by the Financial Reporting Council recommended the creation of a new regulator to be responsible for audit and corporate governance. It is expected that this will be revisited by the government and in the future, sustainability will be reported on as closely as financial metrics.  

Beyond public companies, ESG is also reshaping private markets  

Much of the focus to date has been on publicly listed companies – regulation in the UK and EU is geared towards public companies, and usually those with a large footprint.  

However, private market investors are also increasingly looking at sustainability and good governance as an opportunity to mitigate risk and increase returns for investors. In the private market, investors have one clear benefit that works to their advantage – they usually own a larger slice of the businesses they invest and have therefor greater influence on how these businesses are run.  

The increasing popularity of private markets for big asset owners looking after the savings of millions of individual means we can expect to see some changes in this space too. Regulation formalising reporting of sustainability and governance metrics to come to private markets in the near future seems likely 

Communication is key  

Investors and asset managers need to be able to demonstrate their funds, portfolios, and investments are in line with the most up to date and relevant regulation, whilst companies will need to report and disclose on their social and environmental impact.  

As the ESG evolution sweeps across the economy, corporate communications will be a key function for businesses in every sector. It is crucial now to show how sustainability is a part of each company’s corporate identity. With risks of not doing so ranging from reputational to being denied access to capital, the time to act is now.  

If you would like to hear more about the issues currently shaping the policy and media agenda and how to best engage with these stakeholders, contact us on UKteam@humebrophy.com