What is ESG and why is it important for HR professionals?

What is ESG and why is it important for HR professionals?

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ESG considerations are increasingly becoming a top priority for businesses, but what is ESG? In this article we take a look at what ESG is, why it is important for HR professionals and what HR professionals can be doing to help their businesses with their ESG credentials.

What is ESG?

ESG stands for "Environmental, Social and Governance" and it is these broad areas of interest which many investors consider key priorities when determining whether or not to invest in a particular business, rather than merely considering the level of profitability and / or risk which an investment may yield. In addition to investors, customers and prospective hires are also increasingly looking at a business’s ESG credentials to allow them to make informed decisions on future dealings and job applications. The focus on ESG factors is borne out of a desire for businesses and their investments to be more socially responsible and sustainable and has gained traction in recent years due to the increased focus on the environment and sustainability globally.

Taking each of the three strands of ESG in turn:

  • Environmental: the environmental focus is on the impact of a business on the natural world, for example, the impact of a business’s practices upon climate change, carbon emissions and pollution levels. It also looks at what businesses are doing to reduce their impact on the environment, such as utilising renewable energy resources and recycling.
  • Social: the social focus is on a business’s impact on its employees, workers, contractors and its wider community relations for example, the importance and focus a business places on issues such as gender and diversity inclusion, modern slavery, mental health, employee rights and its corporate social responsibility programmes (CSR).
  • Governance: the governance focus is on the running of the business itself, for example, ensuring diversity in the composition of boards and responsible executive remuneration and hiring practices.

Taken together, E, S and G are the three central pillars used to measure the sustainability and ethical impact of a business. Although the factors are mostly non-financial, investors, customers and prospective hires utilise ESG performance to determine whether to invest either their money and/or their time in a particular business. As such, a business’s ESG performance can assist with attracting investment, customers and talent, which can ultimately affect the financial performance of companies. Stock prices of those companies with high ESG rankings have been identified as being less volatile than those with low ESG rankings and data is also starting to identify a positive correlation between sound ESG practices and financial performance. The focus on ESG credentials is therefore important, not only from an environmental and sustainability perspective, but also from a profitability perspective.

Why is ESG important for HR professionals?

The focus of ESG has, until fairly recently, been on the environmental impact a business has on the communities it serves. However, since the global COVID-19 pandemic, there has been a shift, with greater focus now being placed on social issues.

As mentioned above, the "S" in ESG focuses on the social impacts of a business, particularly on its workforce and wider supply chain. Whilst businesses may be aware of the need to turn their attention to boosting their ESG credentials, there are not yet any set metrics to measure a business’s performance in each of the three areas. A further challenge is that the type of metrics which are relevant to one sector may not be relevant to another. However, given that many social issues in a workplace are intrinsically linked to issues that HR professionals deal with on a day-to-day basis, it is nevertheless important for HR professionals to be aware of the key areas of focus of ESG to assist their businesses with boosting its ESG credentials. We look at some of the key areas of focus for HR professionals across a variety of sectors below:

Diversity and inclusion. The importance of ensuring workplaces foster a diverse and inclusive working environment is widely acknowledged. A diverse workplace enables a business to appreciate a range of perspectives and brings a wide mix of skills and experience that may not otherwise be achieved. Further, where a business’s workforce is a true reflection of society, it follows that the business will achieve a greater understanding of their customers. It has also been shown both employee engagement and employee retention are strengthened as a result of a focus on diversity and inclusion which in turn positively impacts on a business’s reputation, success and profitability.

Mental health and wellbeing. Perhaps more than ever before, the COVID-19 pandemic highlighted the need to be aware and mindful of the mental health and wellbeing of a business’s workforce, with successive lockdowns creating stress, anxiety and loneliness for many and with extended periods of isolation exacerbating conditions that had previously been manageable in some. Raising awareness of mental health and wellbeing in the workforce is part of the fostering of an inclusive environment in which employees are able to talk openly about any mental health and wellbeing issues they may be experiencing. Further, it is estimated that 91 million working days are lost each year due to mental health related illnesses. It is therefore important for businesses to create working environments that promote health and wellbeing and that facilitate the engagement and productivity of employees, which ultimately results in better performance, reduced turnover and increased profits.

Pay. Remuneration is another key factor when looking at the social aspects of ESG. Increasing attention is being focused on not only ensuring that the National Minimum Wage is being paid, but that businesses are committing to paying a living wage to their workforce to ensure an increasing number of the workforce are able to meet every day needs. The introduction of the requirement for certain businesses to report on their gender pay gaps has also focused attention on those employers where there is pay inequality based on gender. There is also increasing pressure on businesses to report on pay disparities between employees based on race and disability. Pay is an area considered by investors, applicants and customers alike to assess how ethical a business’s practices are and the value placed on the workforce.

Executive remuneration. The issue of executive pay has also been highlighted in recent years and is a factor that not only affects the social impact of a business but also reflects its governance practices. The social element of executive pay was again highlighted by the pandemic, with scrutiny being applied to businesses to ensure that executives were not receiving excessive bonuses, particularly where a business had made use of the furlough scheme or had reduced employee salaries. We saw during the pandemic that businesses that chose to pay bonuses to executives despite a reduction of pay for employees received negative publicity, leading to reputational damage which can be difficult to recover from.

Modern slavery. The UK Modern Slavery Act 2015 introduced a requirement for businesses which are large enough (global turnover over £36 million) to publish a Modern Slavery and Human Trafficking Statement. The statement encompasses the steps that the business has implemented in the previous year to ensure that the business does not engage in practices which amount to modern slavery or human trafficking, either in their own business or those within their supply chain. Regardless of whether a business is required to publish a statement or not, it is important for businesses to demonstrate that they have robust measures in place to prevent, identify and quickly remedy any issues which may arise. Investors, customers and prospective candidates wish to ensure that businesses have sound practices in place and show commitment to safeguarding not only those involved in their own business, but also those in the wider supply chain.

What can HR professionals be doing to help their business with its ESG credentials?

There are a number of areas that HR professionals can focus on to assist their business with its ESG credentials.

Policies. The implementation of key policies such as a diversity and inclusion policy, a modern slavery policy and a whistleblowing policy in addition to effective grievance and disciplinary policies can assist businesses in effectively tackling issues that arise in respect of discrimination, harassment, bullying and exploitation. If implemented correctly, policies can be effective in ensuring that employees have the tools to enable them to raise any issues they experience in the workplace at an early stage.

Training. It is important for employees, particularly those in management positions, to receive training to allow them to spot issues such as discrimination, stress and anxiety, which could be affecting the workforce. Effective training can equip managers with the tools to identify and deal with issues at an early stage, which will help to avoid situations where the issue escalates to a point where employees do not feel able to continue in their roles. Businesses may also wish to consider appointing and training designated mental health first aiders to be a first port of call to any employees who are suffering with mental health issues.

Gender pay and ethnicity reporting. Although it is a requirement for businesses with a headcount of 250 or more employees to report on their gender pay gap statistics, businesses who are not legally required to report may wish to consider reporting in the interests of transparency. Although not yet a legal requirement, we have seen an increase in businesses moving to voluntarily reporting on their ethnicity pay gap and it is expected that businesses will also look to report on pay gaps for those employees with a disability in the near future. Reporting on pay gaps helps businesses to identify areas which they need to address and also enables prospective investors, customers and candidates access to key information which will impact on their decisions to deal with the business in future.

Collection of diversity data. The collection of diversity data is important for businesses to be able to benchmark their performance. Although there is no requirement for employees to provide such information, if employees are willing to disclose their data it will be useful for the business to analyse the data and reflect on where the business is at in terms of its diversity and inclusion practices. The findings from data can to help to identify any potential diversity issues and also inform future strategy and targets for the business.

Corporate Social Responsibility. Businesses are likely to have had CSR programs in place for several years, such as volunteering with local charities, pro bono initiatives and raising funds for causes which align with the business’s values. It is important for businesses to continue their commitment to supporting their communities and continue to invest time in projects which have value not only to the communities, but also it has been shown to have a positive impact on employee engagement and wellbeing as well as a business’s reputation.

The Chancery Lane Project. On 19 April 2021, The Chancery Lane Project published 21 new clauses for its Climate Contract Playbook for Earth Day. The purpose of the clauses is to develop contracts and model laws to assist with fighting climate change and achieving net zero carbon emissions. We have highlighted two of the clauses which HR professionals may wish to consider including in employment contracts.

The first is known as "Scarlett’s Conditions". The purpose of Scarlett’s Conditions is to link executive bonuses to meeting climate targets, with the aim being that linking targets to remuneration will assist in focusing attention on reducing the impact of the business on the environment. The second is known as "Athena’s Clause". The purpose of Athena’s Clause is to require the employer to provide, and to require employees to attend, a range of climate change awareness interventions such as training on the environment and sustainability.

There are also a number of other clauses which are helpful to businesses when considering their impact on the environment which can be used in all areas of the business including commercial contracts, corporate mergers and acquisitions, finance, real estate and intellectual property.

Consideration should also be given to whether a business wishes to include clauses in employment contracts that encourage employees to be mindful of the environment and sustainability. Contracts could include, for example, the ability for employees to work flexibly where appropriate to reduce the environmental issues relating to commuting and to encourage the use of sustainable business travel. Another example is to consider gifting an additional day’s holiday to allow employees to travel to a foreign country more sustainably by road, ferry or rail as opposed to flying, or providing two additional day’s holiday to encourage employees to choose to take their holiday in a domestic location.

Final thoughts

Although ESG is a relatively new concept, it is fast becoming a key topic of consideration for businesses. Although there are no defined metrics by which to measure a business’s ESG performance, investors, customers and job applicants are more interested than ever in a business’s commitment to the environment, its people and the running of its business in an ethical and sustainable manner. We have highlighted a number of ways in which HR professionals can be assisting their business in focusing on its ESG credentials in this article and would be pleased to discuss ways in which Stevens & Bolton can assist with your business’s ESG strategy.

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