Three reasons why good governance is critical to business sustainability

In a world marked by rapid change, good governance is more important than ever. Recently, Ontario Teachers’ CEO Jo Taylor spoke to global business and investing leaders at the International Corporate Governance Network’s annual conference in Toronto, Canada. Find three of his key insights below.

Good governance is good business

No matter how the world changes, good governance helps create and protect value over time. Companies with good governance practices tend to have policies that support better decision-making and better outcomes. As one example, having a fulsome board recruitment process allows organizations to build effective and diverse boards with broader skillsets. With more inclusive and diverse leadership teams, deeper discussions can be had on corporate strategy, capital allocation and sustainability initiatives, and better decisions lead to better performance.

Well-governed businesses are also generally more agile in times of change and crisis. Governance frameworks that clarify management and board accountabilities help build cultures rooted in transparency and open communication, which contribute to successfully navigating rapidly evolving issues.

Having good governance systems in place enhances our ability to deliver our pension promise to our members. Every year, Ontario Teachers’ pays out billions of dollars to pensioners. In 2022, we paid out over $7 billion, which is more than double what we received in contributions from working members. While this funding imbalance will get even more challenging in the future, engaging with companies about their corporate governance practices helps to ensure that we choose the best investments and improve the resilience of the businesses we invest in.

Strong governance practices support key sustainability issues

Expectations for Environmental, Social and Governance (ESG) factors have risen significantly in recent years, putting pressure on companies to demonstrate progress on the most important issues facing them and their stakeholders. Many businesses have set ambitious commitments to help improve the environmental and social outcomes of their businesses and communities.

To reliably improve the sustainability of businesses, governance structures must be applied to support environmental and social commitments. This is particularly true when addressing the need for businesses to publish clear, relevant and complete ESG disclosure. Not only do better disclosure policies and practices help us understand a company’s sustainability efforts, risk profile and opportunity set, they also keep companies accountable to delivering progress against their targets.

These views apply to our own sustainability efforts. Having a robust, fully integrated governance component in our climate change strategy, to support meaningful engagement on climate-related disclosure, was essential to reduce our portfolio emissions intensity. As part of our strategy, we ask portfolio companies to begin measuring and reporting their carbon emissions and provide resources to help them do this. In turn, increased visibility has allowed us to better understand our portfolio emissions intensity and make progress on reducing it.

Because an effective governance structure guides our emissions-reduction activities, we have made significant strides to boost carbon emissions reporting in our direct private portfolio to over 80% of emissions, up from 37% in 2019. Better coverage has been an essential part of our activities that have seen us decrease our portfolio emissions intensity by 32% compared with our 2019 baseline.

Practicing good governance helps create long-term value

Businesses can practice good governance by applying clear policies and practices for boards, employees, operations and supply chains to support more sustainable outcomes. Investors can champion desired minimum standards of behavior through public company voting, and engagement with boards to help reinforce those choices. Voting against directors for a lack of progress, when needed, sets the tone for change.

Broadly speaking, we have seen the collective actions of businesses and investors pay off over time. For example, data indicates that there is positive momentum on gender diversity among larger public issuers. Across most of the developed markets we invest in, the average gender diversity on boards now exceeds 30%. In addition, a handful of markets including France, Italy and Norway have adopted a minimum of 40% representation of women on boards. This is encouraging, but there is still much progress to be made.

To build a more sustainable future, we need to be champions of the changes that we want to see in the world. Enhancing our own governance practices alongside our portfolio companies is an important part of how we can achieve the best outcomes. Our investments, people, businesses and communities all stand to benefit from the value this creates.