Value in 60 Seconds: ESG and ROIC. All about the G.

5 Jul 2023 · 1 min

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The G in ESG matters most because governance determines whether a company can deliver environmental or social benefits. Executive pay tied to ROIC, which measures how well leaders manage investor capital, ensures compensation reflects actual governance quality.

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There's lately a trend where executive compensation has been getting tied to ESG. Do you think that's a short-term thing? That's a great question.
One of the things I always say about ESG is that the G is the most important. No matter how much good you might be doing for the environment or for society, if your business is not sustainable, Well, then it doesn't matter because you're not going to be able to continue to do that good. The G, which stands for governance, is back to how is this business run? What are the executives motivated to do? Understanding the return on invested capital of a company to me is the most important part of ESG because it helps me understand what kind of governance is regulating the actions of the agents of investor capital. Executives are the agents of the capital. Investors are the owners. You want to make sure you hold your agents accountable for doing right by your capital. Governance is first and foremost a function of what executives get paid for.