Governance focuses on how decisions are made within a company and who is responsible for those decisions.

In the context of ESG, governance is widely considered the operational foundation of the framework. Where the Environmental (E) and Social (S) pillars address a company’s external impacts, the Governance (G) pillar focuses on the company’s internal systems and rules that guide those external impacts. These internal systems establish who is responsible for decisions and ensure the company can be held accountable for its environmental and social impacts.

What are the core elements of governance?

When assessing a company’s governance, it is important to consider how ethical and transparent its structure and decision-making processes are. This typically involves several key factors:

• Board Structure: Is the Board of Directors diverse and independent?
• Executive Pay: Is compensation aligned with the company’s long-term sustainability and performance?
• Business Ethics and Integrity: Does the company have strict codes of ethical conduct (e.g., policies against bribery and corruption)?
• Shareholder Rights: Do the people who own the company have a real voice in major decisions and access to honest financial data to make informed decisions?
• Risk Management: Are there internal controls in place to catch legal or financial risks before they arise?

In Canada, these factors are guided by both corporate law (such as the Canadian Business Corporations Act and the Ontario Business Corporations Act) and securities law (such as the Securities Act and related National Instruments), which set a minimum standard for how companies must be governed, how decisions are made, and what information must be disclosed to shareholders and regulators.

Why is governance so important?

An organization’s governance framework affects how well it can meet its legal duties and business goals and can affect its overall value.

• Strong governance: Organizations with strong governance frameworks usually have clear rules and oversight in place. These help to ensure consistent decision-making, compliance with legal requirements, and better management of financial and operational risks.
• Weak governance: Weak oversight or poor internal processes can create problems. This may lead to non-compliance with laws, conflicts of interest, and a lack of transparency, which can result in financial instability and reduced trust from investors or stakeholders.

More information

For more information, visit The Canada Energy Regulator and ESG – Overview of Environmental, Social, and Governance (ESG).

								
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