Governance and Sustainability
By Kurt Lieberman and Daud Vicary Abdullah
Sustainability is at the forefront of many discussions about the future, yet the word is so often taken for granted that it generally goes undefined. Among Webster’s definitions for “sustain”, healthy and enduring are common themes.
‘Sustainability’ is most often used within the context of environmental issues, but it frequently applies to social issues as well. Within the context of business, sustainability can refer to investments, social consciousness, environmental responsibility, and good corporate citizenship.
In financial services, there is a common caveat emptor that “past performance is no guarantee of future results”. Financial institutions in the United States are required by regulators to include this disclaimer with any investment performance data, but it can apply to environmental and social performance as well.
The way we study and research sustainability gives us only limited ability to forecast the actual sustainability of current environmental and social performance. Looking at statistics on historical trends of environmental and social metrics only provides a limited capacity to forecast the future and predict forthcoming sustainability. Further, current good environmental performance is no guarantee of future good environmental performance. Truly sustainable performance requires a healthy situation today AND good prospects for endurance over time.
Fortunately, governance can provide insight into future sustainability. If current environmental performance is good, while at the same time an entity’s governance process is good, then the prospects for future environmental performance are also good. The same is true for social performance. Conversely, if governance is weak, then there should be less confidence that good performance can be sustained.
At the country level, there is a strong correlation between governance and environmental and social performance. Various rankings have been compared to show this relationship. For example, country-level environmental and social performance is ranked by the Social Progress Imperative’s Social Progress Index. When correlated with the Magni country government indexes, these rankings have relatively similar positions.
Data showing the correlation between companies’ environmental and social performance and their governance is just beginning to emerge. Soon, we expect to see articles showing the positive link between corporate governance quality and environmental and social performance.
Good governance gives investors more confidence in the future environmental and social performance of a company. If a well-governed company already has good environmental and social performance, it is likely to maintain that performance. Additionally, if a well-governed company does not currently have good environmental or social performance, it is more likely to be able to improve its performance than is a poorly governed company.
Once again, it is important to encourage good governance at all levels. When assessing organizations, we should supplement assessments of environmental and social performance with assessments of governance. Better governance should be encouraged everywhere. The way we think about how to create a positive future—which we refer to in shorthand as relevance, trust, and impact (#RTI)—is implicitly about creating enduring impacts. We need to take steps to make #RTI sustainable.
Kurt Lieberman is CEO of Magni Global Asset Management LLC. Daud Vicary Abdullah is the Managing Director of DVA Consulting Sdn Bhd and a Trustee of the RFI Foundation. This article was adapted from a post on July 19 by the same authors within a blog series published by IslamicMarkets.com.