Understanding corporate governance is an important part of impact investing. As impact investors, a lot of emphases is put on reviewing ESG (environmental, social, and governance) factors as they pertain to investments. ESG factors are what separate impact investments from traditional investment options. When reviewing options with their advisers, many new impact investors choose to focus on the first two factors. Environmental and Social. Why? Because they are easiest to understand.
Understanding Environmental and Social Factors
For many investors, Environmental factors are what brought them to impact investing in the first place. This factor allows advisers and their investors to review companies with environmental missions. They could be focused on combating climate change, reducing waste, eliminating pollution, or creating alternative energy sources. It also helps them remove companies from their stock portfolio that are doing damage to their local environments or are a major source of pollutants entering the atmosphere (think oil and gas companies).
Social factors showcase companies that have a strong socially responsible outlook. They may contribute back to organizations and causes either locally, nationally, or globally that help combat hunger, stop the spread of disease or other worthwhile causes that make a difference on our planet.
What is Corporate Governance?
Governance, however. Governance is a factor that is often overlooked but equally as important. Governance factors illustrate whether a company operates with accountability, integrity, and equality in all of its practices. Governance is often reviewed independently by referring to the policies and procedures a company follows not only when addressing reports and shareholders but in their day-to-day operations.
Corporate governance is the system that directs and controls businesses. The governance of their companies is the responsibility of their boards of directors. The shareholders‘ role in governance is to appoint directors and auditors, as well as to ensure that an appropriate governance structure is in place.
Why Corporate Governance is Important
Corporate governance is important to investors because it demonstrates a company’s direction and business integrity. Good corporate governance enables businesses to build trust with their investors and the community. As a result, corporate governance promotes financial viability by providing market participants with a long-term investment opportunity.
Companies with strong governance factors often have a racially and gender diverse board of directors, fair and ethical work standards (think equal pay for equal work), and a code of conduct that is practiced among all levels – from interns, to executives, to the board itself.
Many corporations with high governance factors have executive pay-caps and bonus reviews, are transparent about political spending and candidate backing, and contribute a percentage of their earnings back to their community in some way.
Why Corporate Governance and What is its Impact
The recognition of shareholders is one of the most important principles of corporate governance. The acknowledgment is twofold. The basic recognition of the importance of shareholders to any company – people who buy the company’s stock to fund its operations – comes first. One of the most important sources of funding for businesses is equity. Second, the principle of shareholder responsibility flows from the basic recognition of shareholder importance.
Allowing shareholders to elect a board of directors is a critical policy. The “primary directive” of the board is to always seek the best interests of shareholders. The board of directors hires and supervises the executives who make up the team in charge of a company’s day-to-day operations. This effectively means that shareholders have a direct say in how a company is run.
Your investments are a reflection of your values. Advocate for your values with the companies you have trusted with your investments. Interested in reviewing ESG factors as they pertain to your values? We offer many different socially responsible portfolios and offer custom screens including:
- Shareholder Advocacy
- Community Impact Investments
- Employee Relations, Environment
- Product Safety
- Corporate Governance
- Military Contracting
- Nuclear Power
- Animal Testing
- Avoidance of Repressive Regimes
Want to learn more about impact investing and how you use your money for good? Reach out to Invested Interests online.