When you make the decision to incorporate ESG (environmental, social, and governance) values into your investments, there is often a heavy focus on the first two criteria because they’re easier to understand.
And for many of us that makes sense: it is essential to ensure our money is invested in companies with positive social or environmental missions – or conversely, kept away from corporations who are damaging our planet or harming their communities. Yet the third criterion – governance – should not be overlooked.
“Corporate Governance” refers to the set of rules and policies a company has set in place to ensure investors (and other stakeholders) of its integrity, responsibility, and accountability. A firm’s good governance practices, often established via a diverse and independent board of directors, will impact all parts of the business, allowing a clear set of values to trickle down from the top to all employees. A governance-focused board will consider the needs of the company’s shareholders while taking care to operate fairly in its business practices and to avoid lawsuits and fines. It will work hard to ensure there is no ambiguity in regards to the company’s standards, its ethical stance to business, or how decisions are made and risks averted.
Some other examples of good corporate governance practices are…
- A dedication to corporate citizenship and helping the local community.
- Clear accountability standards for the board and top level management.
- Establishing a code of conduct for conflicts of interest, ethical dealing, and compliance.
A company focused on good governance is also much more likely to address fair and equal pay and unlikely to allow CEOs to award themselves lavish pay raises or bonuses. Such corporations are often transparent about political spending and allegiances, allowing investors to evaluate if their moral values are truly aligned with their investments.1
Contrary to some reports, choosing to invest in companies with such standards does not necessarily mean sacrificing returns. While traditionally some money managers believed SRI could theoretically hurt performance by reducing the size and diversity of portfolios, studies now indicate ESG investing isn’t just about being principled, it can in some ways be a smarter kind of investing.
Indeed, companies with poor governance records can have problems. For example, Facebook and Equifax both rated low on data security, which is a criterion of corporate governance, and recently experienced painful performance drops after data breaches.2
Research shows that historically, socially responsible investments have done just about as well as other investments (or better). While OpenInvest won’t promise you any kind of returns – and nor should anyone else – we are dedicated to using technology to bring honesty and transparency to financial services, while making socially responsible investing easy and more accessible.
We want to ensure that everyone’s finances truly reflect their personal values and can drive positive social change.
- What’s Good About Governance
- How socially responsible investing can help you avoid catastrophic drops within your portfolio (Please note these are just some examples and not the results of a rigorous study.)