ESG is an umbrella term for a broad range of environmental, social and governance factors used to evaluate the performance of the entities, beyond the traditional performance target/s. Using an ESG program, a company is judged on how it behaves as a responsible corporate citizen.
ESG is not only applicable to corporate companies but is also applicable to different types of organisations, such as investors, funds, trustees, shareholders, public sector organisations, consumers and NGOs. The below diagram illustrates ESG measurement targets in a little more technical detail[ii].
Why is ESG gaining prominence?[iii]
First, studies suggest that ESG investing can, under certain conditions, help improve risk management and lead to returns that are not inferior to returns from traditional financial investments.
Second, growing societal attention to the risks from climate change, the benefits of globally accepted standards of responsible business conduct, the need for diversity in the workplace and on boards, suggests that societal values will increasingly influence investor and consumer choices which may increasingly impact corporate performance.
Third, there is growing momentum for corporations and financial institutions to move away from short-term perspectives of risks and returns, to better reflect longer-term sustainability in investment performance.
In this manner, some investors seek to enhance the sustainability of long-term returns, and others may wish to incorporate more formalised alignment with societal values. In either case, there is growing evidence that the sustainability of finance must incorporate broader external factors to maximise returns and profits over the long-term, while reducing the propensity for controversies that erode stakeholder trust
It is therefore paramount for companies to not only understand the hallmarks of an ESG program, but also the critical role that employment law plays in identifying the ESG risks and opportunities.
ESG IN THE WORKPLACE
From an employment perspective, the “S” and “G” in ESG tend to be the most relevant. Here is a summary of some of the key areas where ESG can be of general relevance in the workplace[iv]:
- Equality, diversity and inclusion: how do organisations foster a diverse and inclusive working environment?
- Recruitment, retention and training: what can companies do to attract and retain talent? What investment are they putting into their people?
- Good working practices: what culture is being promoted by an organisation? Are negative working practices being tackled?
- Health and wellbeing: how do companies protect the health of their employees (including mental as well as physical health)? What support is on offer?
- Pay: how do companies approach payment of the national minimum wage, executive remuneration and gender and ethnicity pay gaps?
- Policies and practices: what approach is taken to family friendly or agile working practices? What systems are in place to tackle inappropriate behaviour?
- Whistleblowing: what effective systems and protections have been put in place to take care of both the whistleblower and the wrongdoer?
- Employee engagement: what workplace methods have been designed to improve an employee's feelings and emotional attachment to the company, their job duties, position within the company, their fellow employees, and the company culture
- Worker activism: what actions have been taken to permit workers to speak out for or against their employers on controversial issues that impact society.
Why is ESG important for employers?[
Reputational consequences: Businesses seen to be failing in respect of their ESG could well face criticism, negative publicity and reputational damage. There have been numerous reported examples of ESG employee issues such as modern slavery, sexual harassment and race discrimination having a substantial adverse impact on the share price and market value of large and well-known companies. Kenya Airways recently suffered reputational damage when they employees decided to engage with management over issues of demanding better working conditions and payment of unpaid salaries during the pandemic in court and in the public.[vi]
- Legal consequences and global standards: There is already legislation which gives ESG a legal basis in the workplace; to name but a few: the Constitution, the Employment Act, the Labour Institutions Act, the Labour Relations Act, Occupational Safety and Health Act and Work Injury Benefits Act. It follows that there are legal consequences for failing to comply with this legislation which may result in financial penalties, as well as lengthy and costly legal proceedings. Conversely, proactively focusing on compliance can lead to reduced regulatory and legal interventions. While many countries operate in markets with labour laws that provide relatively low levels of protection to employees, businesses will no longer be able to rely on their geographical location. There are international frameworks that set out expected employment standards across the world by which non-governmental organisations, investors, other stakeholders and the media are now judging businesses. This includes: the UN Global Compact (a sustainability initiative with around 12,000 corporate participants and stakeholders from nearly 160 countries); the International Labour Organisation Conventions and Declarations; the International bill of Human Rights and the OECD guidelines. Due diligence is becoming the norm and there is a surge towards public reporting of what companies are doing (or not doing) in relation to human rights issues.
- The importance of employees: It is not debatable that ESG is creating a happy and positive workforce. A 2021 Edelman study[vii] found that employees are considered companies’ most important stakeholders for long-term success – three times more important than shareholders. In turn, 79 per cent of employees expect their employer to act on important societal issues. ESG performance will become increasingly important to attracting and retaining talent, especially with Millennials and Gen Z making up an increasing amount of the global workforce. Put simply, research shows a clear link between companies’ ESG performance and its workforce retention and morale. Employees expect their employers to act on key issues relating to ESG; those that do so will have a competitive edge in attracting and retaining talent.
- Attracting investors and customers: Investors, customers and clients are increasingly asking about ESG in the investment and procurement decisions they make. Companies who do not have ESG on the agenda may find themselves struggling to attract investors and win clients, as well as facing resistance to their workplace practices.
- Improved performance: Companies with a strong ESG and labour relations proposition have better productivity. Addressing the widening gap between executive and workforce pay is also directly linked to productivity. Fairer incentive structures can help drive an inclusive culture and employee engagement, which in turn, can boost productivity.
- ESG makes financial sense: according to a 2019 report by McKinsey[viii], good ESG management can result in value creation and top line growth. In addition, it can lead to non-financial benefits, including facilitating risk identification and mitigation strategies, boosting employee motivation and creating productivity uplift.
How to Report on Social Measurements[ix]
The “S” in ESG reporting focuses primarily on workplace culture. Investors and boards of directors should expand their focus beyond training and diversity recruiting initiatives. (Although both are still very important.)
While there is no one-size-fits-all approach to ESG reporting, disclosures should include a discussion of the specific concrete initiatives the organization has undertaken to enhance the employee experience and how the organization measures progress toward a more diverse and inclusive workforce some examples are given below.
- Implementation of a code of conduct that clearly communicates the organization’s expectations of its workforce, including leadership, and the repercussion for violating the policy is typically an area of focus. The code must apply to all levels within the organization from entry-level roles to the C-Suite. Executives should be held to at least the same standard as all other employees. The policy should be reissued periodically as a reminder of the organization’s values and commitment to a respectful workplace where all employees can develop and advance. Most importantly ensure that employees are aware of the avenues for reporting concerns.
- Evaluation of periodic employee satisfaction surveys. Report out on the positive findings and evaluate stated concerns or criticisms and implement an action plan to address legitimate concerns.
- Focus on employee wellness. Periodically review the organization’s benefits package to ensure it is competitive.
- Employee resource groups. Empower employee resource groups to raise concerns and recommendations for improvements to senior management.
- Demonstrated compliance with employment laws, including non-discrimination obligations and workplace safety regulations, is a baseline expectation. While a positive compliance record alone is not enough to satisfy investors’ expectations, a series of cause findings by regulators will certainly affect investors’ view of a company’s commitment to equal employment opportunity.
- Organizations should also implement concrete and specific action plans for creating a more diverse and inclusive workplace at all levels within the organization, including the C-Suite. Implementation of a plan that includes affirmative action plan goals, coupled with specific strategies for attracting, retaining and advancing diverse talent. For example, implementation of an annual assessment of the organization’s recruiting efforts and an action plan for updating those efforts; identification of community and industry partners, who may be effective recruiting resources; and implementation of mentoring and employee development programs to prepare high performing employees for promotion opportunities. The plan must also include criteria for measuring success and a demonstrated ability to retool and shift gears when initiatives do not yield the desired results.
- A focus on pay equity is also pertinent. Prepare for pay data reporting, whether in the form of a voluntary public wage gap report or state reporting obligations. Boards and investors, want more transparency with respect to pay. Annual pay equity assessments conducted under legal privilege are more important than ever. Work with legal counsel, public relations, compensation and human resources to determine when, how and what to say about the organization’s pay equity status.
- Shaping employee terms and benefits to incentivise sustainability, lower carbon emissions, inclusivity and diversity;
- Placing employee welfare at the heart of procurement decisions;
- With respect to whistleblowing, companies should ensure they have strong policies that encourage the reporting of any misconduct. Companies should also ensure effective training of management-level employees on how to recognize whistleblowing conduct and, equally important, how to respond appropriately.
- For worker activism, companies would be well-served to partner with labour and employment counsel to understand the nuances of how to effectively respond to an organizing campaign and, potentially, even a union election and contract negotiation.
- With respect to health and safety, COVID-19 has laid bare the essential nature of effective health and safety policies. Companies should pay close attention to labour and employment issues when navigating the myriad of health and safety laws and, in the event of a workplace outbreak or accident, preparing an effective response. And, while not always top of mind with health and safety programs, labour and employment issues arise in the form of wage and hour laws that may be triggered by health and safety policies, e.g., ensuring proper pay during any testing or screening time.
- COVID-19 has also upended the traditional notion of a workplace, requiring companies to quickly adapt to working from home. Labour and employment issues are also intertwined with remote work policies that balance employees' desire for flexibility with the need to ensure productivity and employee engagement.
- Last, but certainly not least, labour and employment counsel are also an essential partner when developing workplace policies related to mental health and well-being. Such policies should be not only proactive — creating a work environment that is supportive of employee mental health — but also reactive — ensuring companies respond appropriately to employees who notify their employer of mental health concerns. During a time where the importance of employee retention cannot be overstated, mental health and well-being programs and policies are vital to companies' ESG programs.
As the discussion above demonstrates, ESG programs are intrinsically intertwined with labour and employment issues. As ESG programs take on increased importance and prevalence, companies would be well-served to ensure the development of their ESG programs is done in conjunction with labour and employment counsel. By doing so, companies will go a long way toward developing first-rate ESG programs. If, however, companies already have ESG programs in place, it would be wise to work with their labour and employment counsel to audit existing policies and practices to determine where areas of improvement may be and develop unique solutions to address weaknesses.
By Carole Ayugi: Partner & Head of Practice - Employment & Pensions
[ii] Thomas Reuters.
[iii] Environmental, social and governance (ESG): an introduction by Paul Davies and Michael Green, Latham & Watkins LLP and Tim Clare, Anthesis Group Practical Law UK.
[iv] ESG horizon scanning: policy and legal measures by Practical Law Environment and Practical Law Corporate.
[v] Farrer & Co LLP, May 2022.
[ix] Environmental, social and governance (ESG): employment implications by Practical Law Employment.