Measuring ESG: why Environmental & Social are weak without Governance

Introducing mandatory environmental and social indicators in the new EU Sustainable Finance Disclosures Regulation (SFDR) risks ending up being ineffective without a clear definition of good governance practice.

As the European Union is moving forward with the development of new legislation as part of the EU Green Deal, B Lab Europe has been following each and every step to make sure that when it comes to stakeholder governance our voice and that of our allies is heard.


Business is key to financing the green transition. Long-term signals are needed to direct financial and capital flows to green investment and to avoid stranded assets.


The EU strategy is to strengthen the foundations for sustainable investment. This notably required that companies and financial institutions need to improve their disclosures on ESG data so that investors are fully informed about the sustainability of their investments. We firmly believe sustainable corporate governance voluntary indicators are useful to signal the level of commitment of an investee to sustainable practices.


The Sustainable Finance Disclosures Regulation (SFDR) heavily relies on the concept of ‘good governance practices’ but does not define what they are. We submit that a lack of any meaningful embedment of sustainability at the highest level of governance constitutes a principal adverse impact (PAI) – any impact of investment decisions or advice that results in a negative effect on sustainability factors, such as environmental, social and employee concerns and respect for human rights.


Therefore, in the context of the public consultation on the Sustainable Finance Disclosure Regulation suggest the inclusion of three new PAI indicators:

  • Lack of sustainability-related performance in incentive schemes to members of the administrative, management and supervisory bodies
  • Lack of oversight over sustainability matters in the undertaking’s administrative, management and supervisory bodies
  • Lack of consideration of sustainability matters in the undertaking’s strategy and its decisions on major transactions, and its risk management policies


A study by the credit rating B Corp Inbonis that explores the importance of implementing proper governance practices in companies and its impact on the financial capital of the company – particularly in relation to credit ratings and access to funding sources – reveals a strong correlation between governance practices and credit ratings.


By having the highest level of governance within a company involved in managing sustainability, there is a better chance of aligning sustainability goals with overall business strategies. This alignment ensures that sustainability initiatives are integrated into the company’s core operations and decision-making processes rather than being treated as separate or peripheral activities.