Oleh:
Jalal – Chairperson of Advisory Board Social Investment Indonesia
Sonny Sukada – Senior Advisor Social Investment Indonesia
Key Takeaways for Executives
- Governance drives ESG. Without governance, environmental and social commitments lack credibility and accountability. With governance, ESG becomes a source of resilience and long-term value.
- ESG oversight must be explicit. Generic board charters or vague commitments expose companies to litigation and reputational risk. Clear governance structures tied to ESG performance create enforceable accountability.
- Accountability strengthens strategy. Linking executive incentives, risk management, and disclosure to ESG metrics ensures alignment between stated goals and actual outcomes.
- Governance is a competitive advantage. Companies that treat governance as a strategic enabler—rather than a compliance burden—will be better positioned to meet investor expectations, manage risks, and capture opportunities in the evolving ESG landscape.
Executives often approach ESG by focusing on the “E” or the “S.” Climate change is seen as an existential risk. Social movements have elevated issues such as racial equity and workplace diversity. But governance—the “G” in ESG—frequently gets reduced to compliance checklists or internal housekeeping. That is a strategic mistake.
Governance is not just another pillar of ESG. It is the operating system that determines whether environmental and social commitments translate into measurable results. Without governance, ESG collapses into rhetoric. With governance, ESG becomes a driver of resilience, risk management, and long-term value creation.
Why Governance Gets Overlooked
Governance rarely captures headlines. Shareholder rights, board declassification, and majority voting sound technical compared with global warming or racial justice. Critics from both sides dismiss governance: some ESG advocates argue G is irrelevant to advancing E and S, while anti-ESG voices argue G proves business should avoid E and S altogether. Both views miss the point.
The reality is that shareholder power—and the governance structures through which it is exercised—shapes every serious corporate ESG initiative. No climate strategy, diversity commitment, or social pledge will succeed if it lacks governance mechanisms to hold leaders accountable and align corporate behavior with stated goals.
The Historical Role of Governance in ESG
The origins of ESG underscore this centrality. The term was coined in the 2004 report Who Cares Wins, which emphasized governance as the foundation of ESG. Early leaders of the movement even argued the acronym should have been “GES,” reflecting the conviction that governance was indispensable. Good governance and robust risk management were described as prerequisites for any serious environmental or social initiative.
Far from being a distraction from fiduciary duty, governance was designed as the bridge between ESG and shareholder value. When structured effectively, governance ensures that environmental and social efforts are financially disciplined, strategically aligned, and credible in the eyes of investors.
Governance as the Engine for E and S
Governance doesn’t just enable ESG—it powers it. The rise of shareholder activism demonstrates that governance mechanisms are the levers through which environmental and social priorities gain traction. Boards that revise committee charters to include ESG oversight, link executive compensation to ESG metrics, and enforce meaningful disclosure transform ESG from aspiration to execution.
This accountability function is essential. Courts have made clear, that the absence of dedicated board oversight can amount to governance failure. ESG charters and committees that move beyond generalities to specify oversight responsibilities reduce risk exposure and increase corporate responsiveness to stakeholders.
Addressing the Governance Challenges
Skeptics argue that boards lack the expertise or information to manage ESG effectively. But these challenges are not unique to ESG—they apply to any complex corporate issue. Strong reporting systems reduce information asymmetry. Director recruitment, training, and continuing education can address expertise gaps. Boards already make strategic trade-offs across multiple domains; ESG requires the same discipline.
In fact, the variety of ESG committee structures reflects a strength, not a weakness. Different boards prioritize different issues. The key is that these choices are explicit, traceable, and aligned with strategy, creating accountability where it matters most.
The Business Risks of Ignoring Governance
Governance is also critical to managing ESG-related risks. Weak governance opens companies to accusations of “greenwashing” or “ESG hypocrisy,” where disclosures don’t match behavior. This creates reputational damage, litigation risk, and regulatory exposure. Stronger SEC oversight, combined with board-level accountability and third-party audits, can improve the reliability of ESG reporting.
Even amid political backlash and “green hushing” (companies avoiding public use of ESG language), governance remains unavoidable. Disclosures are embedded in both voluntary and mandatory filings. Corporate commitments, once made, create legal and reputational liabilities if ignored. Far from signaling the end of ESG, the backlash may actually push companies toward more rigorous materiality assessments and more strategic ESG activities.
What Leaders Should Do
Executives should stop treating governance as compliance and start treating it as strategy. Three actions are critical:
- Embed ESG into governance structures. Revise board charters and committees to specify ESG oversight. Avoid generic language; focus on explicit responsibilities.
- Link governance to accountability mechanisms. Tie executive incentives, risk management systems, and disclosure practices directly to ESG performance metrics.
- Invest in board capacity. Ensure directors have access to ESG expertise through recruitment, education, and reporting systems.
A Five-Level Governance Maturity Model
ESG governance does not evolve in a single leap. Companies advance through distinct stages, each reflecting not only structural improvements but also a shift in mindset. Based on our observations, we identify five maturity levels:
- Reactive Governance. ESG is addressed only when external pressure demands it—whether from regulators, activist investors, or crises. Disclosures are minimal, governance mechanisms are fragmented, and boards tend to view ESG as a compliance burden rather than a strategic concern.
- Responsive Governance. Companies begin to acknowledge ESG more formally, often by creating board-level oversight or revising committee charters. Governance here is about “doing enough” to satisfy stakeholders. Metrics are introduced, but they are often backward-looking and focused on reputational risk.
- Proactive Governance. At this stage, ESG oversight becomes forward-looking. Boards and executives establish clear KPIs, integrate ESG into risk management, and align leadership incentives with sustainability targets. ESG is seen not just as a duty but as a source of competitive positioning.
- Integrative Governance. ESG considerations are woven into the fabric of corporate governance and strategy. Decision-making across the boardroom and C-suite routinely accounts for environmental, social, and governance impacts. ESG reporting is data-driven, standardized, and connected to enterprise-wide performance systems.
- Regenerative Governance. The most advanced level is transformative. Companies treat ESG governance as a mechanism to regenerate ecosystems, strengthen communities, and future-proof business models. Governance structures are not only accountable but catalytic, using ESG as a compass for innovation, long-term value creation, and systemic resilience.
This model provides executives with a roadmap: moving from reactive to regenerative governance is not just about adopting new processes but about redefining what corporate stewardship means in the twenty-first century. Boards that embrace this journey signal to investors, employees, and society that they view ESG not as a constraint, but as a strategic advantage.
The Strategic Payoff
When governance is strong, ESG delivers. Companies can align environmental and social initiatives with financial discipline, creating resilience, competitive advantage, and credibility with investors and stakeholders. When governance is weak, ESG commitments risk becoming hollow promises—inviting backlash, litigation, and erosion of trust.
The lesson is clear: governance is not the neglected third pillar of ESG. It is the strategic engine that makes environmental and social ambitions possible. Companies that get governance right will not only strengthen their ESG credibility—they will position themselves for long-term performance and leadership in a rapidly evolving business environment.
