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Why does ESG matter?

3 Aug 2021 By Nicole Bigby and Jackie Thomas

Nicole Bigby and Jackie Thomas explain why HR professionals should be considering environmental, social and governance factors as part of their strategies

ESG refers to a broad range of environmental, social and governance factors against which a variety of stakeholders (including investors, employees, clients and the wider community) can assess company performance and value. 

With growing emphasis on corporate purpose and responsibility, and employees as stakeholders, employment experts are ideally placed to take a pivotal role in ESG strategy, with a particular focus on the social and governance issues. 

Employment experts make an important contribution in two key areas. With a strong understanding of market practice and future trends, employment experts can design innovative approaches to support social goals. 

Employment experts are also well placed to identify risk. For example, they understand the challenges inherent with positive action, so can ensure that diversity initiatives are ambitious while assessing and seeking to avoid legal pitfalls. 

A company’s social ESG performance can be broadly assessed across six areas using metrics to benchmark current performance and areas for development. 

  • Diversity and equality – businesses are measured on the diversity of their workforce. Initiatives for improvement include recruitment strategies, tackling barriers to retention and providing education and awareness on diversity issues. 

  • Human rights – businesses have a responsibility to respect human rights in their operations and business relationships, including their value chain: ensuring a clear policy and utilising due diligence to identify potential risks and inappropriate practices (for example the use of forced or child labour) and putting in place a plan for addressing issues. 

  • Fair wages – this area is ripe for reporting and comparison with competitors. Many UK businesses already report on gender pay and there is pressure for other metrics to be published. This includes ethnicity pay reporting, assessment of entry level pay, and a comparison of CEO remuneration against the average worker’s pay. 

  • Health and wellbeing – businesses are expected to protect the health of their employees. While there is a tendency to focus on physical health, mental health is now considered equally important. Measures include wellbeing based benefits programmes, staff training on mental health issues and changing business cultures which are damaging to employee mental health.

  • Training – a well-performing business is expected to invest in its people, both through technical and soft skills training. 

  • Stakeholder engagement – staff and stakeholder engagement more generally underpins a holistic and resilient ESG approach. Positive steps can include staff surveys, encouraging employees and affected stakeholders to speak up via effective whistleblowing policies, other grievance mechanisms and minimising the use of NDAs.

Social factors in practice

Companies are increasingly scrutinised by stakeholders on the measures they are taking concerning their ESG performance and goals. For example, candidates now treat social ESG issues as a distinguisher when choosing roles and ESG-related failings can lead to public censure via social media. 

Tackling these issues in an holistic and integrated way across a business’s operations is vital to ensuring an authentic and credible approach that aligns managing risk and maintaining reputation and stakeholder trust. 

In relation to wellbeing, employers are grappling with hybrid working arrangements following the pandemic. Employers that are slow to adapt or who push for a return to the old working ways are already seeing the impact on retention. 

Public employee activism, in particular across generations with different expectations around work, is increasing and younger employees are often unwilling to compromise on work-life balance, instead gravitating towards forward-thinking employers.

Further, campaigns such as Black Lives Matter have put diversity issues firmly on the general public’s radar as an issue that businesses have a responsibility to engage with. Companies are therefore keen to demonstrate their wider support for diversity and racial justice matters. Successful businesses are taking a joined-up approach which supports both existing employees and community-based groups.

Less impressive are businesses that make public statements in support of diversity but do not follow through in their wider actions, which creates an accountability gap between stakeholder expectations and experience. In particular, initiatives which generate profits or are delivered without considering holistic alignment with social responsibility, such as through delivery or sourcing, reciprocal donations or activities in support of the underlying cause, can receive significant negative publicity.  

Placing an impact upon people perspective and employment experts at the heart of ESG policy is therefore important, both to maximise positive outcomes but equally in understanding the wider context. This thereby avoids reputational damage and other harm caused when social measures are misaligned and/or badly implemented in respect of a business’ legal and social risk governance position. 

Nicole Bigby is a partner and general counsel for EMEA and Asia, and Jackie Thomas is an associate director, both at Bryan Cave Leighton Paisner

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