Environmental, Social, and Governance (ESG) principles have become significant considerations for companies worldwide, and Nigeria is no exception. These principles are often grouped, but each component—Environmental (E), Social (S), and Governance (G)—plays a distinct role in shaping corporate strategies and outcomes. Among them, "G" or Governance, seems to hold particular appeal for shareholders, perhaps even more so than "E," which focuses on environmental sustainability.
To understand why governance might be more appealing, it's important to look at the core interests of shareholders and how good governance directly affects these interests.
Shareholders are fundamentally concerned with the financial performance and stability of the companies they invest in. Good governance is crucial to achieving these objectives, as it ensures that companies are well-managed, transparent, and accountable. In Nigeria, where corporate scandals and financial mismanagement have marred investor confidence, strong governance is seen as a safeguard against such risks.
Governance structures include the roles and responsibilities of the board of directors, the integrity of financial reporting, compliance with regulations, and the ethical conduct of business operations. When these structures are robust, they help prevent fraud, reduce risks, and enhance the long-term profitability of companies. For shareholders, these outcomes translate into better returns on investment.
Several cases illustrate the importance of governance in maintaining shareholder confidence. One notable example is the corporate governance reforms in the Nigerian banking sector after the financial crisis of 2009. During this period, poor governance practices, including weak oversight by boards and questionable management decisions, led to the collapse of some banks and near collapse of several banks. The subsequent reforms, which included stricter governance standards, were instrumental in stabilising the sector and restoring investor confidence.
Another example is the ongoing emphasis on corporate governance in listed companies on the Nigerian Exchange. The exchange's Corporate Governance Rating System (CGRS) in partnership with the Convention of Business Integrity (CBI) evaluates companies on their governance practices, rewarding those that score highly with greater visibility and investor interest. Shareholders tend to favour companies with high CGRS scores, as these companies are perceived as lower-risk investments.
While governance is critical to shareholder interests, environmental concerns are also gaining traction, though perhaps not as quickly or as uniformly. The "E" in ESG relates to how companies manage their impact on the environment, including their use of natural resources, emissions, and waste management. In Nigeria, where environmental challenges such as pollution, deforestation, and climate change are pressing issues, the relevance of environmental sustainability is undeniable.
However, the appeal of environmental initiatives to shareholders can be more complex. Unlike governance, which directly impacts financial performance and stability, environmental initiatives often require significant upfront investment and may only yield long-term benefits. For example, a company investing in renewable energy or cleaner production methods may face higher costs in the short term, which can be a deterrent for shareholders focused on immediate returns.
Moreover, environmental regulations in Nigeria are still evolving, and enforcement can be inconsistent. This situation creates uncertainties for companies and their shareholders. While some investors are increasingly considering the environmental impact of their investments, others may prioritise short-term financial gains over long-term environmental benefits.
Despite the challenges, there is a growing recognition that governance and environmental concerns are not mutually exclusive. In fact, companies that effectively integrate both aspects into their strategies are likely to achieve sustainable growth and attract a broader base of investors.
Take, for instance, the Nigerian oil and gas sector, which is both a major economic driver and a significant contributor to environmental degradation. Companies in this sector have been under increasing pressure to improve their environmental performance while maintaining strong governance practices. Those that have managed to do both, such as adopting cleaner technologies and ensuring transparent reporting, have not only mitigated environmental risks but also enhanced their reputation and shareholder value.
Shareholders play a crucial role in shaping a company’s ESG priorities. Globally, there is a growing movement among investors to demand more from companies in terms of both governance and environmental stewardship. Shareholder activism is on the rise, with investors increasingly using their influence to push for changes that align with their values and long-term interests.
For example, some shareholders are advocating for greater transparency in how companies report their environmental impact. They also push companies to adopt more sustainable practices, even if these may not yield immediate financial returns. At the same time, shareholders are insisting on stronger governance practices, recognising that these are essential to managing risks and ensuring long-term profitability.
There is no gainsaying that "G" in ESG holds more immediate appeal for shareholders than "E." Good governance directly impacts financial performance, risk management, and shareholder value, making it a top priority for investors. However, this does not diminish the importance of environmental sustainability. As the global and local markets increasingly recognise the value of sustainable practices, the "E" in ESG is gradually becoming more prominent in shareholders' considerations.
Certainly, the most successful companies will be those that can effectively balance governance and environmental concerns, creating value for shareholders while contributing positively to society and the environment. Shareholders, for their part, must continue to advocate for integrated ESG strategies that ensure long-term success and sustainability.
Research & Advocacy Department,
Chartered Institute of Directors (CIoD)
28, Olawale Edun Road, (Formerly Cameron Road), Ikoyi, Lagos.