Governance and Sustainability
July 19, 2018 | Updated at July 26, 2018
You are now reading the eighth post in our blog. We are very grateful for the positive feedback on the prior posts.
We have addressed a wide range of issues related to sustainability, yet the actual word has hardly been used. We take this commonly-used word for granted, so it generally goes undefined. A good definition is in Merriam Webster’s Collegiate Dictionary (both of us are old enough to have printed dictionaries). Sustainability is derived from the word “sustain”. Sustain has many definitions, with healthy and enduring over time being common themes across the definitions.
The most prevalent use of the word is in the context of environmental issues, but it is also used frequently in relation to social issues. Within the context of performance, sustainability can refer to investments, social consciousness, environmental responsibility and good corporate citizenship.
Truly sustainable performance requires a healthy situation today AND good prospects for endurance over time. Even looking at statistics on historical improvements in environmental and social performance still provide one with limited ability to forecast the future.
In financial services there is a common caveat emptor that “past performance is no guarantee of future results”. Financial institutions in the United States are required by regulators to include this disclaimer with any investment performance data, but it can apply to environmental and social performance as well. The way we study and research sustainability gives us only limited ability to forecast the actual sustainability of current environmental and social performance. Hence, current good environmental performance is no guarantee of future good environmental performance.
Fortunately, the quality of governance can provide insight into sustainability. If current environmental performance is good, while at the same time governance is also good, then the prospects for future environmental performance are also good. The same is true for current social performance. Conversely, if governance is weak, then there should be less confidence that good performance can be sustained.
At the country level, there is a strong correlation between governance and environmental and social performance. Various rankings have been compared to show the relationship. For example, country-level environmental and social performance is ranked by the Social Progress Imperative measure. These rankings have been correlated with the Magni Country Scores for country-level governance. Most countries have similar relative positions among the two rankings.
Data is just beginning to emerge at the company level. We expect to soon see articles showing the positive role of corporate governance on environmental and social performance.
Good governance enables investors to have more confidence in the future environmental and social performance of a company. If a well-governed company already has good environmental and social performance, it is likely to maintain that performance. Additionally, if a well-governed company does not currently have good environmental or social performance, it is more likely to improve versus a poorly governed company.
Once again, it is important to encourage good governance at all levels. When assessing organizations, we should supplement assessments of environmental and social performance with assessments of governance. Better governance should be encouraged everywhere. Relevance, trust and impact (#RTI) is implicitly about enduring impact. We need to take steps to make #RTI sustainable.
Kurt and Daud