Four ways corporations can contribute to their communities, the planet, and sustainable investment opportunities

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Four ways corporations can contribute to their communities, the planet, and sustainable investment opportunities

Corporate governance is key for the private sector to advance a more resilient world because it defines the structures and processes a company puts in place to facilitate sound decision-making and to maximize long-term value creation while safeguarding the interests of all stakeholders.

Robust corporate governance enhances operational resilience and facilitates inclusive development, allowing companies to generate positive impacts in the communities in which they operate. Simply put, corporate governance is an intricate part of the private sector’s ability to contribute to the triple bottom line: people, planet, and profit.

I see four ways corporate governance is driving action toward this goal.  

First, corporate governance goes hand-in-hand with robust environmental and social (E&S) risk management. Research has shown that environmental, social, and governance (ESG) risk awareness and management can improve long-term financial performance. In other words, ESG considerations and business and economic success are inextricably linked.  Boards must effectively oversee E&S risks, skillfully manage stakeholder engagement and promote transparency on its sustainability performance. IFC’s Corporate Governance Methodology, used in its investment and advisory operations, was updated in 2018 to incorporate these elements and support more robust E&S risk management. 

Second, corporate governance is moving the needle toward sustainable development by pushing boards to address both the risks and opportunities of climate change. In other words, no company can afford to dismiss the effects of climate change on its business and, ultimately, on its financial performance. As institutional investors continue to press companies to eliminate greenhouse gas emissions by 2050, board members have a moral and fiduciary duty to act. IFC and others encourage boards to identify, monitor, and respond to climate-related issues and incorporate climate considerations into their business models and strategies.

Third, corporate governance supports gender-diverse business leadership. Gender and diversity in all forms are hallmarks of highly functioning boards. More women on boards positively affect how companies address sustainability issues. For example, a recent IFC survey showed that companies in emerging markets with between 20 and 60 percent women on their boards were more likely to have formal climate change-related commitments and net-zero goals compared to boards with less than 20 percent female representation.

In addition, boards with 30 percent female representation exhibit higher overall ESG standards,with stronger internal controls, reduced risk of fraud or ethical violations, increased stakeholder engagement, and stronger company brands.

Fourth and finally, good corporate governance leads to greater disclosure and transparency, allowing capital flows to shift to sustainable investment opportunities. With global development ambitions outlined in the 2030 Sustainable Development Agenda to the Paris Agreement, investors and stakeholders want to understand how a company creates long-term value and supports sustainability. That’s why they increasingly look for reporting and disclosure on climate-related risks and opportunities, for instance, to help direct capital toward climate mitigation and adaptation essential for a sustainable future.

This is especially critical in emerging markets where development challenges are most severe. Yet, in those markets, investors often face shortages of ESG data. To address this gap, IFC developed MALENA, a tool powered by artificial intelligence to extract ESG insights from dense reports and news to enable data-driven sustainable investments.

Now, more than ever, corporate governance matters.  Corporate governance matters to address risks and maximize performance. It matters for climate action. It matters for women and greater inclusion. It matters for sustainable investments – enabling ESG information, transparency and disclosure.

Ultimately, a sustainable future must be built with sound, solid, and strong corporate governance at its core. 

Emmanuel Nyirinkindi

Vice President, Cross-Cutting Solutions, IFC

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