Social and Corporate Governance Factors in ESG Investing

This chapter delves into the intricate dynamics of corporate governance within the scope of environmental, social, and governance (ESG) investing, underscoring its pivotal role in shaping investment decisions. It lays out the foundational principles of corporate governance, including shareholder rights, equitable treatment of shareholders, stakeholder roles, disclosure, transparency, and the board of directors’ responsibilities. The chapter pays special attention to the implementation of sustainable development principles within corporate activities and highlights the importance of integrating ESG factors into these governance frameworks. In developed countries, the system of relationships between key corporate players—such as shareholders, managers, directors, creditors, employees, and others—is well-established, aiming to maximize corporate efficiency, attract investments, and fulfill legal and social obligations. The chapter differentiates between corporate management and governance, with the latter encompassing a broader interaction among various entities impacting a firm’s functioning. It emphasizes that corporate governance is not just about business operations but also involves creating long-term value through aligning financial and social performance and ensuring accountability and legitimacy in the eyes of society. The chapter introduces a four-pronged model of corporate governance, encompassing people, purpose, process, and performance, each playing a vital role in the organizational structure. It also discusses the importance of shareholder rights, equal treatment of all shareholders, the role of stakeholders in governance, transparency in corporate operations, and the critical responsibilities of the board of directors in steering the company’s strategic direction. Finally, the chapter addresses the challenge of ensuring that the interests of shareholders, who are the corporation’s owners, are observed in an environment where significant decision-making information is often asymmetrically distributed in favor of managers. It explores the internal dynamics of corporations and their interactions with external environments as potential capital sources, highlighting the varying forms of corporate governance across different countries.