By Jonathan Ofori NYAMEDI & Esther LARYEA
In Ghana, the significance of Environmental, Social, and Governance (ESG) is becoming more apparent as firms are encouraged to demonstrate strong governance, social responsibility, and environmental stewardship.
Governance Takes the Throne: Why It’s Key to Firm Value
Breaking ESG down further, we found that all three pillars of ESG—Environmental, Social, and Governance—positively impact firm value. However, there is a twist in the tale. Governance performance emerges as having the most significant impact on firm value, while environmental performance has the least significant impact on firm value.
We posit that environmental performances have a less significant impact on firm value because implementing effective environmental practices often requires significant financial investment and specialized expertise compared to social and governance practices, which could be achieved more quickly and at a lower cost.
In addition, environmental-related actions may have more extended gestation periods to produce results compared to the other dimensions of ESG; hence, firms may consider short-term financial gain over long-term environmental sustainability.
Ghana’s Securities and Exchange Commission (SEC) mandates compliance with its corporate governance code for all listed companies, with non-compliance subject to sanctions. This code includes provisions on board composition, shareholder rights, risk management, executive compensation and ethical conduct.
The Securities and Exchange Commission, The Companies Act 209 and other regulatory frameworks serve as a catalyst for listed firms to prioritize governance practices and align with international standards. We assert this may explain the significant impact of governance performances on firm value.
A potential reason for the significant impact of the social and governance pillars could be that investors place a substantial emphasis on firms that demonstrate strong social responsibility and good governance practices.
Culture heavily influences business practices in Ghana, and as such, firms that prioritize stakeholder engagement, community development, and ethical practices may be seen as more attractive and superior investments. Together, these findings suggest that companies in Ghana can no longer afford to overlook ESG if they want to thrive in today’s competitive market.
Beyond Ethics: The Business Case for ESG
For many companies, ESG has often been viewed as a moral obligation, a way to “do the right thing.” However, ESG should be viewed as much more than that. It is a powerful tool for driving financial performance and creating long-term value for shareholders. In Ghana, companies that excel in ESG are not just contributing to sustainable development; they are also positioning themselves for tremendous financial success.
By integrating ESG into their core business strategies, these companies can enhance their competitiveness, attract more investors, and ultimately improve their bottom line. This makes ESG not just an ethical imperative, but a smart business move that can provide some sustainable competitive advantage.
Investors, Take Note: ESG is the Future of Returns
For investors, our findings serve as a wake-up call. In a world where sustainability is becoming increasingly important, companies that prioritize ESG are the ones most likely to deliver better long-term returns.
Ignoring ESG factors in investment decisions could mean missing out on significant opportunities for growth and profitability. Ghanaian investors, in particular, should pay close attention to the ESG performance of the companies they invest in. As the global shift towards sustainability continues, those who recognize the value of ESG early on will be well-positioned to reap the rewards.
A Call to Action: How Policymakers Can Drive the ESG Revolution
Policymakers in Ghana have a unique opportunity to take charge of promoting ESG practices across the corporate sector. Our findings highlight the need for policies that encourage or even mandate ESG integration into business operations. The government, Ghana Stock Exchange, and other governance bodies should actively promote integrating ESG practices into corporate strategies across all Ghanaian industries.
This is cardinal to unlocking the potential financial benefits of sustainable practices for Ghanaian listed firms. What about a bit of motivation? Policymakers should offer tax breaks, subsidies, and other financial rewards to companies that demonstrate strong ESG performance; we believe this will stimulate a culture of responsible business practices, motivate companies to step up their ESG game and enhance the firm’s long-term value.
By strategically investing in ESG integration, policymakers lay the foundation for a more sustainable future for local companies and society. This policy also has the potential to position Ghana as a frontrunner in sustainable development within the African continent.
Furthermore, policymakers can enhance the enforcement and monitoring of ESG related regulations and guidelines to ensure that companies are adhering to their ESG commitments. This could involve the establishment of dedicated ESG regulatory bodies and the implementation of robust compliance mechanisms and the imposition of penalties for non-compliance. To intensify the environmental activities of companies, there should be the introduction of strict and mandatory environmental reporting requirements.
Additionally, developing a Ghana ESG rating system can provide a transparent and standardized way to evaluate and report on ESG performance.
Looking Ahead: The Bright Future of ESG
As we stand on the brink of this ESG revolution, the message is clear: ESG is not just a passing trend—it is the new cornerstone of corporate success. In Ghana, companies that embrace this reality are shaping their own futures and contributing to the broader story of a nation committed to sustainable growth.
The path forward is clear. Companies that prioritize ESG will survive and thrive in the new era of business. By focusing on sustainable practices today, Ghanaian businesses can secure a prosperous future for themselves and the nation. As the narrative of corporate success evolves, let us champion the cause of ESG practices, paving the way for a sustainable future that benefits all. The dawn of a new era is upon us—let us seize it together.
The writers are with Ashesi University
