‘Governance should be viewed as the means of facing environmental and social risks and opportunities – not as an isolated element.’ That’s according to a recent note published by SquareWell Partners, in which the shareholder advisory firm argues that governance needs to be ‘put back in the spotlight’ as ESG has become increasingly synonymous with sustainability.In response to MSCI’s recent 2022 ESG trends to watch report, which states that climate change has overtaken corporate governance as the most pressing ESG issue commanding investors’ attention, SquareWell says ‘this perception that governance is a competing issue to climate change for companies’ and investors’ attention is wholly misleading.’

SquareWell says part of this melding of E, S and G is down to the growth of passive investments, as well as the growth of the ESG industry, as it puts it: ‘the proliferation of disclosure frameworks on ESG issues alongside the myriad of ESG ratings and research providers.’The firm argues that these two trends have had the ‘unintended consequence’ of driving a focus on sustainability as a disclosure item, rather than as a matter requiring strategic deliberation within the boardroom.

‘In contrast to this, by virtue of their investment strategy, only active managers are able to identify those companies that are communicating an integrated strategy that aims to capture the risks and opportunities presented by global trends and, therefore, attribute a lower valuation to those that don’t,’ it says.It adds that ‘legacy’ governance issues such as overboarding and director independence remain relevant and that, increasingly, investors are demonstrating stricter views on governance issues compared with those of proxy advisers. For example, it says that last year, among the largest 100 US and European companies, only 29 percent and 21 percent, respectively, of directors receiving 10 percent or more opposition faced a negative recommendation from ISS and Glass Lewis.

Board expertise and accountability, board diversity and executive pay remain key issues, while sustainability governance is a growing topic of concern for both investors and proxy advisers.

Time to separate the G from ESG, SquareWell Partners argues | Corporate Secretary