Rivista Corporate Governance ISSN 2724-1068 / EISSN 2784-8647
G. Giappichelli Editore


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ESG: The Importance of Corporate Governance. The extent to which ESG factors have been incorporated into self-regulations and external regulations (di Giovanni Barbara)


1. Introduction - 2. Steps taken so far - 3. Italy's position compared with the UK - 4. Possible solutions and future ESG scenarios - NOTE

1. Introduction

I have already observed that sound corporate governance is a topic of great interest and that society as a whole is fully aware that virtuous action by business managers can make a real and immediate impact and influence the national economy [1]. These days, it is also clear that for corporate governance to be sound, special attention has to be paid to social issues. It is necessary to understand whether, to achieve sound corporate governance, it is sufficient to have self-regulation, which usually works “… quite well, when interests focus on the same objective” [2], or whether it is necessary to adopt progressive regulations that can speed up reconversion of the market economy into a sustainable system [3]. Whatever the solution, any action plan will require, first and foremost, an accepted definition of the concept of sustainability, so that a set of rules can be put together to safeguard the integrity of the market and build investor trust [4]. Internationally, the focus nowadays is all on embedding environmental, social and governance (“ESG”) factors as the key component of corporate governance. The attention already devoted and increasingly devoted to ESG factors not only by governments, authorities and academics but also by distinguished journalists and the press [5] is proof enough that the effects of corporate governance on society are significant and decisive. It can be argued that there is nothing very new about corporate social responsibility ‒ especially ESG factors; however, we need to see whether the numerous successful steps already taken have mapped out the definitive route towards this goal, and whether there has therefore been a real shift in practices, or whether, since as yet “there are no obligations but only good intentions [6]”, there is still a long way to go, despite a general increase in sensitivity towards this issue [7].

2. Steps taken so far

Some of the most recent and noteworthy ESG initiatives, events and legislation are summarised below. a) The Business Roundtable On 19 August 2019, the Business Roundtable ‒ an association of 181 chief executive officers of America’s leading companies, chaired by Jamie Dimon of JP Morgan ‒ published a paper promoting the idea that, in order to create long-term value, corporations should not have one sole purpose: to pay dividends to shareholders [8]. Instead, they should also consider the impact of their business on the environment [9] and on local communities, their relationships with suppliers, and the terms of employment that they offer to their workers [10]. b) Business for inclusive growth On 23 August 2019, a paper drawn up by 34 multinational corporations, including European companies, was presented in Paris, as part of the Business for inclusive growth [11] initiative, sponsored by the French President, Mr Macron, with the aim of pooling and strengthening efforts by private companies to reduce inequalities linked to opportunity, gender and territory, and to build greater synergies with government-led efforts. c) The UN 2030 Agenda for Sustainable Development and the Principles for Responsible Investment In terms of sustainable development, Europe has made a good start. Also in implementing the UN 2030 Agenda for Sustainable Development, Europe is strongly committed, together with its Member States, to being a trailblazer [12]. The six Principles for Responsible Investment were promoted by the UN in 2006 and should be applied globally by all UN member states by 2030. All the signatories have undertaken to incorporate ESG issues into investment analysis and decision-making processes [13]. d) Proposal of 24 May 2018 for a Regulation of the European Parliament The European Commission’s proposal of 24 May 2018, on the establishment of a framework to facilitate sustainable investment, also “lays the foundation for an EU framework which puts Environmental, Social and Governance (ESG) considerations at the heart of the financial system to support the transformation of Europe’s economy into a greener, more resilient and circular system” [14]. The aim of the proposal is, in particular, to integrate “ESG considerations into the investment and advisory process in a consistent manner across sectors. This should [continua ..]

3. Italy's position compared with the UK

To date, more than 200 corporations in Italy have prepared a non-financial statement, demonstrating that information is flowing onto the market and thus towards investors [23]. However, information collected by CONSOB [24] reveals that: (i) contrary to the rules laid down in Legislative Decree no. 254/2016, no voluntary non-financial statements have been published; (ii) various listed companies, even if they do not have to comply with the decree, have voluntarily published non-financial information in other ways, e.g. in ad hoc sustainability reports or in special sections of their directors’reports; (iii) some listed companies are too small to fall within the scope of the decree, as they have fewer employees than the number indicated in the decree itself [25]. It is now necessary to investigate further, to understand whether sustainability targets in Italy are really a priority for internal boards and committees and, in particular, how ESG policies are actually being pursued by companies. In exploring these questions, one must bear in mind that the key players ‒ those who perform a pivotal role in committing a company to sustainable development ‒ are its directors. It is the board of directors that is the most appropriate body to plan and authorise policies that enable management to fulfil their responsibilities towards the company [26]. In particular, we need to ask how corporate governance structures have changed in the last few years and how governance of sustainability has evolved in Italy compared with other European countries. One answer to these questions, can be found by looking at the results of a survey conducted in Italy in order to see how Italian businesses view the activities of boards of directors. This survey compared some of the top Italian listed companies with the top 100 listed companies in the UK [27]. It emerged that: (i) more than half (52.5 percent) of FTSE-MIB companies have changed their sustainable governance structure and that a good number of these changes took place in 2016, right after the amendments made to the Corporate Governance Code [28]; (ii) close to the deadline of 31 December 2016, there was a rise in the number of companies that made radical improvements to their sustainable governance structure. The changes recorded over the last few years show, in particular, that: (i) there has been a considerable rise in the number of FTSE-MIB [continua ..]

4. Possible solutions and future ESG scenarios

We have already seen how, at international and European level, issues connected with ESG factors are being tackled by providing information to the market in the form of non-financial statements, and by developing governance of sustainability within companies. It is now time to consider what the next steps might be in developing greater awareness and total involvement of businesses in ESG matters. In the eyes of investors, the growing sensitivity and attention paid by corporations to the topic of sustainability and virtuous behaviours has paid off; investors, for the most part, see a business not only as an organisation capable of producing profits, but also as an organisation that, through non-financial reporting and sound rules of governance, is capable of increasing its business value and, as a result, its competitiveness [31]. However, there does not seem to be any doubt that the soil already partially tilled [32] by self-regulation needs to be planted on a massive scale with obligatory rules and regulations. Up to now, self-regulation has certainly played a key role; now it is necessary to introduce some solid legislation, in which quality will be more important than quantity. Even so, self-regulation must reaffirm its own importance by playing a supporting and complementary role, accompanying legislation and regulation every step of the way. In general terms, that is. More specifically, it will be necessary to reconfirm, also in connection with ESG factors, the importance of corporate governance and the central role of the board of directors, which must necessarily formulate, approve and disclose strategies for sustainability and for the measurement of targets. It will be the duty of an ad hoc committee to monitor implementation of the policies approved by the board. Moreover, regulators will need to agree on how to make it compulsory to include further obligatory information in non-financial statements. At the moment, one of the limits is that financial disclosure and non-financial disclosure seem to be travelling along parallel tracks, without ever converging [33]. And yet, the points of contact between them are increasing and are evident, because of changing social dynamics and because of the market’s demand for more transparent information from companies. Within the EU, the number of proposals is increasing significantly. One of the most important ones is to combine non-financial and financial information in a [continua ..]