ESG: disentangling the governance pillar

In 2004, the World Bank’s International Financial Corporation (IFC) laid a cornerstone for the debate with the publication of the report “Who Cares Wins”, which provided principles where interpretations of the idea of ESG could stand. Since the release of IFC’s report, the construction of the idea of ESG has gained momentum – and there is no sign that the movement will cool down (Cappucci, 2018;Clementino & Perkins, 2020;Eccles, Ioannou, & Serafeim, 2014;Paolone, Cucari, Wu, & Tiscini, 2021;Schoenmaker & Schramade, 2019). [...]it is expected that these contractual interfaces will establish clear procedures for the voicing of concerns and the renegotiation of the terms of the relationship over time. [...]this choice is nothing more than the selection of a specific way in which this contractual interface will be managed – which, of course, will depend on how the preferences of relevant stakeholders are gathered and articulated into specific strategies. [...]our message is straightforward: the idea of governance within the ESG cannot be reduced to the notion of corporate governance. Effective ESG-based governance policies should provide an answer to two related challenges: the existence of decision-making costs, which affect the participation of stakeholders and may impair the definition of priorities that reflect the preferences of stakeholders at the corporate governance level;and the existence of contractual costs, which limit our ability to design efficient governance mechanisms in a competitive environment (Hansmann, 1996).