In our latest ESG instalment, we will focus on the topic of Governance. Of equal importance but often underestimated, matters of governance are a key component in how businesses address their ESG approach. The import any business gives to governance is key; strong governance provides employees with assurance. More widely, it also instils confidence in other stakeholders from third party service providers to investors in that business.
As with the other component parts of ESG, there is some overlap between governance and the environmental and social limbs, but at its core, governance can perhaps be best described as the way in which a business conducts itself. More specifically, it is a focus on how it behaves from an internal and external perspective, working both within defined parameters as set out by existing legislation as well as more general expectations imposed by society.
Regarding the former, businesses are expected to conform to respective legislative requirements regarding their behaviour, incorporating everything from the Companies Act 2006 through to specific market-related demands such as those laid out by the FCA, the body which regulates financial businesses and firms.
As such, there are a number of areas that a business will need to consider. Many might be familiar with the UK’s Corporate Governance Code - whilst primarily directed at listed companies, the document contains good guidance for application in businesses generally. Published by the Financial Reporting Council (FRC), it deals with what many would consider to be some of the key focus areas for an organisation’s board – notably: board leadership, allocation of its responsibilities, composition, audit & risk and remuneration.
Looking at board leadership, the code identifies that ‘a successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society’. Ultimately, the board must drive a business and the way it conducts itself, recognising the responsibility it has to its stakeholders and ‘wider society’.
Arguably more easy to execute is how the board allocates its responsibilities, defining the chair as well as executive and non-executive directors. Nonetheless, such appointments should be handled with care and in a transparent manner that has the best interests of the business at its core. Indeed, the composition of any board should be driven by meritocracy. Furthermore, selection of the board should incorporate principles set out in the Equalities Act 2010, promoting a diverse and inclusive culture, and overlapping with its social ESG focus.
From an audit and risk perspective, the board must lead by example - ensuring that all financial reporting is true and transparent, facilitating independent audits. However, the financial responsibility of the board stretches beyond just its reporting and audit requirements to how it manages risk. The type of risks that a business may be exposed to are broad ranging but, nonetheless, require a focussed approach that incorporates robust internal control frameworks.
Lastly, the code considers remuneration and the need for financial compensation to also be clear and transparent. Importantly, pay and bonuses should be appropriate and geared to long term strategies in particular, to avoid schemes that can encourage detrimental behaviour, affecting both the business and its stakeholders. Again overlapping with the social element of ESG, remuneration should consider a wider context, the best example being gratuitous bonuses during economic recession.
Whilst implantation of the aforementioned measures might indicate a strong governance focus, supplemental to this is an effective whistle blowing policy. Further to the Public Interest Disclosure Act 1998, employees should be comfortable that substantive policies exist through which concerns can be raised, where necessary. Alongside such policies, organisations must include unequivocal guidance in relation to bribery and corruption. Businesses need to ensure that appropriate policies help enforce a zero tolerance approach, through guidance on preventing, detecting, reporting and investigating associated matters. Indeed, policies should be a reflection of the respective legislation that underpins this area such as the Bribery Act 2010.
From a CrowdProperty perspective, ESG and particularly governance are at the core of how we work. We recognise that as a specialist development funder, there are a number of key stakeholders in our business - all of whom expect strong governance. From developers to our investors, there is an implicit responsibility to ensure we adhere to respective legislation as well as implement robust frameworks that instil confidence in us and our brand.
This vision is deployed from the top, through a diverse board of executive and non-executive directors. As a secured lending provider, we are authorised and regulated by the Financial Conduct Authority, and as such, ensure we go beyond the requirements prescribed by that regulator. Given the nature of our business, there is a necessary and detailed focus on risk, in particular regarding prospective and ongoing loans. Our investment committee and the assurance they provide is an integral part of our commitment to high levels of governance.
Alongside ongoing staff training, internal departments are focussed on a broad range of due diligence, including Know Your Client (KYC) and credit checks for example, thereby upholding strong governance values across the organisation.
Whilst from a construction and project perspective it is easier to write about sustainability - and this is something we will be revisiting as we develop products to meet an ongoing and growing need for finance that supports sustainable construction – the other two pillars of ESG are also critical issues, all of which tie together. Indeed, we look into all of these in one form or another as part of our underwriting process on loans as well as internally regarding how we operate at CrowdProperty.
CrowdProperty has funded over £460,000,000 of property projects by SME property professionals, funding the development of more than 2,200 homes. This is still just the start of our mission to transform property finance to build more homes, increase spend in the UK economy and ever more efficiently and effectively match the supply and demand of capital for the benefit of all. Together we build a better future.
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