The elusive G in ESG

Mark Robinson, Executive Director of the EITI, explains why a broader take on governance matters when considering corporate ESG performance.

Why does the G in ESG matter?

Investor interest in Environmental, Social and Governance (ESG) performance indicators is greater than ever. This interest is largely spurred by climate and human rights considerations, which respond to the environmental and social dimensions of ESG. But progress on developing an agreed set of governance indicators has been lacklustre, with little agreement on their scope beyond good corporate governance. This hampers the ability of investors to assess a company’s governance performance. Experience from EITI’s supporting companies offers insights into how the "G" in ESG might be strengthened for wider industry reporting purposes.

Companies increasingly wish to attract investors by demonstrating adherence to a range of climate targets, centred on mitigation through reduction of CO2 emissions and investments in natural capital. They also seek to demonstrate respect for human rights, reflected in good labour practices, gender equity, and following "do no harm" principles. The ongoing challenge is coming to agreement on these standards and how corresponding performance indicators should be measured.

Governance metrics for ESG purposes are principally focused on internal corporate governance, including executive remuneration, board composition and risk management. These are relatively well developed and understood, informing investment decisions focused on well-managed companies. For this reason, they should remain an integral part of governance performance metrics. But they only tell part of the story: company adherence to high governance standards also needs to be assessed through a broader set of governance norms centred on issues such as ownership, contracts, investments and taxes. Such norms should be measurable and enable companies to be held to account. The intent of the ESG movement was not to create a tick-box exercise, but to ensure that companies are actively addressing the right issues and evolving practices to create positive impact. 

Lessons from EITI company expectations

The EITI Standard is a framework for reporting on governance indicators along the extractives value chain by its 57 implementing countries and companies operating in these countries. This generates rich information on exploration, licences, contracts, ownership, production, exports, sales, revenues and payments, as well as environmental and social metrics.

The Expectations for EITI supporting companies have been developed and published in consultation with EITI’s 60+ EITI supporting companies members. Progress on the Expectations for each company was assessed in 2021 and will be assessed again in early 2023 and published on the EITI’s website. They provide a robust benchmark for corporate accountability that goes beyond corporate governance to offer a basis for a more credible set of governance indicators, not only for companies in the energy and extractive sectors, but more broadly across industry, to enrich the G in the ESG agenda. Many of these Expectations are consistent with data and reporting generated by publicly listed companies, depending on legal and regulatory provisions in the country in which they are domiciled.

Of particular relevance to the ESG agenda are the following EITI company expectations, each of which has wider industry application:

• Transparency commitments: “Publicly declare and publish support for the EITI…to make the EITI Principles and the EITI Standard the internationally accepted standard for transparency in the oil, gas and mining sectors.” This is similar in purpose to UNPRI’s Principle 4 – that companies should promote acceptance and implementation of the Principles within the investment industry. Both can serve as a model for similar high-level public commitments by companies outside the oil, gas and mining sectors, drawing on a range of transparency and governance standards in their respective sectors.
• Comprehensive disclosure: “Make comprehensive disclosures in accordance with the EITI Standard in all EITI implementing countries where the company or its controlled subsidiaries operate.” EITI supporting companies are encouraged to publicly disclose a list of controlled subsidiaries in EITI implementing countries, where this is not disclosed elsewhere. This Expectation could provide a strong foundation for company disclosures and finer metrics in other sectors.   
• Tax transparency: “Publicly disclose taxes and payments to governments at a project-level in line with the EITI Standard in all non-EITI implementing countries where the company operates unless disclosure is not feasible.” The majority of EITI supporting companies are meeting this expectation. A number of EITI supporting companies, including BP, Repsol, Rio Tinto, Shell and Vale are going further by publishing tax transparency reports, detailing tax payments by category and jurisdiction, with an increasing level of granularity. This leading-edge practice could provide the basis for industry-wide metrics on tax transparency and complements existing ESG indicators on tax strategy and country by country reporting, such as those developed by the Global Reporting Initiative.
• Financial disclosures: “In line with the EITI Standard, publicly disclose audited financial statements.” This is standard for publicly listed companies, but the level of detail and consistency of reporting varies. Such information is often not widely available for state-owned enterprises and some private companies, which limits their potential to access capital markets, strengthen stakeholder confidence and build public trust.
• Beneficial ownership transparency: “Publicly declare and publish support for beneficial ownership transparency and publicly disclose beneficial owners in line with the EITI Standard.” While most listed companies will disclose beneficial owners through stock exchange filings, private and state-owned companies present more of a challenge, unless they are required to report on beneficial owners (especially politically exposed persons) in their country of domicile or operation. A number of EITI supporting companies signed up to a Statement by Companies on Beneficial Ownership Transparency in September 2021, where they confirmed commitments to full disclosure of beneficial owners, serving as a model for others. The new recommendation of the Financial Transparency Task Force gives further force to this expectation for companies operating across sectors. Beneficial ownership transparency is increasingly a norm for investors, who see ownership declarations as a hallmark of good corporate governance.
• Anti-corruption: “Engage in rigorous due diligence processes and publish an anti-corruption policy setting out how the company manages corruption risk…”. Company commitments to tackling corruption are growing, and investors and the public alike take a dim view of corruption risk. There is also a growing expectation among policymakers that companies should adopt a more public position on tackling corruption risk in response to high profile corruption cases and investments in challenging governance environments.  
• Contract disclosure: “Publicly declare and publish support for governments’ efforts to publicly disclose contracts and licenses that govern the exploration and exploitation of oil, gas and minerals in line with the EITI Standard.” Some EITI supporting companies have led by publishing details of all their contracts. Some EITI implementing countries have also raised the bar, by requiring full contract disclosure on a retrospective basis. These provisions offer a strong foundation for a broader governance metric on contract disclosure that has relevance across sectors. Companies that support contract disclosure and disclose contracts demonstrate their commitment to transparent deals, strengthen corporate and government accountability, and build trust with the public at large.

Meeting public and investor expectations on governance

The EITI Standard and company expectations offer important metrics that can inform the development of cross-industry transparency standards for ESG reporting purposes. EITI supporting companies that demonstrate adherence to these Expectations provide critical information to investors and credit rating agencies who care about such metrics. Investors can draw on these Expectations in making sound investment decisions and to encourage the development of industry-wide performance metrics to fill out the G in ESG reporting. This has the added benefit of meeting public expectations of companies to maintain high standards of transparency and deepen corporate accountability.