Renewed Focus on Governance Proves ESG Is More Than Just Sustainability

Sustainability initiatives may be all the rage, but an increasing number of scandals among high-profile startups and highly-valued corporate behemoths is underscoring the role governance plays in corporate health and due diligence.  

As WeWork prepares to go public next month via a SPAC with BowX Acquisition Corporation, “it’s important to note that the first IPO failed miserably,” writes Trepp’s Jyoti Yadav in a new analysis, including “skewed voting power and strong centralized control” that gave founder Adam Neumann shares each worth 20 votes. 

And “the significant valuation cut that WeWork incurred (from $47 billion in the 2019 IPO to $9 billion now) underlines the fact that governance issues, while not discussed as often as environmental or social issues in ESG space, can have a significant economic impact,” Yadav says.

She also points to the recent collapse of Wirecard, dubbed “the Enron of Germany” by some analysts. The company, which was once the most valuable financial services company on the DAX exchange, became insolvent in 2020 after failing to account for 1.9 billion Euros. Its chief executive was also arrested on charges of inflating Wirecard’s books.

“To note here, Fidelity analysts had given Wirecard a rock-bottom ESG rating months before the scandal broke on account of a problematic corporate culture, inadequate management of ethical risks, and sub-standard boardroom governance,” Yadav says.

And in the CMBS space, apartment developer Robert Morgan was charged by the FBI in 2019 for allegedly participating in a 12-year mortgage fraud scheme. Trepp compiled a list of CMBS debt associated with the company and highlighted the list on its website.

For commercial real estate investors, a focus on governance should include the obvious inquiries into the ethical operation of a company in a way that creates values for shareholders, as well as more due diligence. And unlike environmental and social data, which is still fairly new, governance data “has been compiled for a longer period of time and the criteria for what comprises good governance and its classification has been more widely discussed and accepted,” according to Yadav.

Investors are increasingly renewing their focus on governance issues as ESG interest surges, in large part because good governance equals a more solid bottom line. A report late last year from BofA Global Research found that US companies with high (top quintile) ESG rankings in the S&P 500 index have outperformed their counterparts with lower (bottom quintile) ESG rankings by at least 3% every year for the past five years. 

“For many years Governance has been a topic—in particular, for public funds as it pertains to their public securities holdings,” Dan Cashdan, president and senior managing director of JLL Capital Markets, told GlobeSt in an earlier interview. “Over time Social issues with regard to DE&I have worked their way into investor underwriting, if not specific decision making, beginning in 2021 there has been a flood of interest and apparent commitment or engagement on the topic of Environment—really climate change. The subjects are in many ways independent—and yet easily interwoven. A challenge is to make real sustained progress one each both independently and collectively.”