Why good governance is critical to long-term investing

We explore what a breakdown in good governance means for investors.

Good governance is the foundation upon which functioning markets, responsible businesses and better long-term investment outcomes depend. And today, that foundation is under strain. 

The importance of good governance

Across environmental, social and governance (ESG) issues, governance often feels like the quiet sibling — important, but less visible than headline-grabbing climate and social challenges. Yet governance is the pillar that holds everything else up. It’s what’s needed to turn a company’s strategies into successful outcomes and the same is true for countries.

What’s more, without the fundamentals of good governance – political stability, predictable institutions and an impartial legal system – environmental and social commitments are less likely to be reliably delivered.

Climate targets will struggle to survive in environments where regulatory decisions swing with political winds. Social progress can’t be protected in societies where the rule of law is weakening. And without strong democratic norms, it becomes harder and more expensive for businesses to operate, making their sustainability efforts much harder to deliver.

Never underestimate the rule of law

If democracy is the architecture of a resilient and thriving society, then the rule of law is the machinery that keeps the economy running. It’s the grease that allows markets to function quietly, consistently, often invisibly.

It helps ensure that: 

• Corporate and political power is kept in check
• Competition happens fairly
• Property rights are protected
• Contracts can be enforced.

We’ve grown accustomed to this machinery working in the background, and for many decades investors have been able to take the rule of law for granted.

But these aren’t simply abstract ideals that can be overlooked – they represent some of the basic conditions economies need to grow and flourish. Without them, markets break down, trust weakens, volatility increases and the cost of investment risk rises.

What this means for investors

Some of the events of 2026 might feel exceptional, but they’re part of a bigger shift: more political uncertainty, more populist backlashes and increasing pressure on democratic systems. These challenges feed directly into changing market conditions that advisers must navigate, including: 
 

• More uncertainty in key industries: when governments make unpredictable decisions, sectors, including energy and tech, become harder to understand and value. This can lead to more volatile investment performance and could reduce long-term returns. 
   
• New, unexpected risks: political shocks or sudden changes in rules can create “out of the blue” market drops from circumstances that weren’t previously on investors’ radar.  
   
• Money flowing into challenging areas: in turbulent times, portfolios may become more heavily weighted towards sectors like oil and gas companies and defence. These aren’t automatically at odds with clients’ sustainability goals or ethical preferences. But any significant shift may need careful conversation to ensure continued alignment with clients’ values and comfort levels. 

A critical moment for company governance

We’re at an inflection point. The political uncertainty we’re seeing around the world is a reminder that democracy and the rule of law can’t be taken for granted.
 
These systems might have been quiet and easily overlooked in recent history, but as essential parts of how stable markets function, they form the foundations on which long-term investing relies.
 
For companies, being able to manage this fast-changing environment will increasingly be seen by investors as a sign of higher-quality management and good internal governance. Recognising the importance of these foundations isn’t about investor politics. It’s about understanding risk, enhancing client resilience and supporting the potential for better long-term outcomes.

Investing your clients’ savings responsibly

At Royal London, we understand this. We recognise the real impact ESG issues, including concerns around good governance, can have on your clients’ savings and investments.
 
That’s why we consider ESG issues in the investment solutions we develop. As a large, active investor, we use a diverse toolkit of approaches to identify and manage the potential impact of ESG risks and opportunities across different asset classes, helping to inform our choices on how and where to invest your clients’ money.
 
If you’d like to find out more, visit our page to see how ESG integration fits within our overall approach to responsible investment.