The 'governance' pillar of ESG refers to a company’s decision-making governance. This includes factors such as sovereign policy making and the distribution of rights and responsibilities among its stakeholders and shareholders. Some of the key issues covered under this pillar are the company’s purpose, the role and composition of its board of directors, whether there are any conflicts of interest or unethical practices among senior leadership.
As with the other two pillars of ESG, the governance pillar presents companies with risks that are outside their internal operations. Companies are also exposed to risks from the various third parties they partner with across their end-to-end supply chain, such as suppliers, distributors, logistics, agents and other intermediaries. And while governance risks often don’t capture as much media attention as other ESG risks like forced labour or pollution, they can be just as damaging to a firm.