ESG: an explanation
May 2022 | SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS
Financier Worldwide Magazine
May 2022 Issue
What are environmental, social and governance (ESG) criteria and why do they matter? ESG is used to measure the sustainability of an employer’s practices.
In the modern world we live in, with challenges such as climate change and a societal push toward greater equality and diversity, employers are expected to drive change and have a sustainable business strategy. On top of that, ESG is something which is increasingly driving the financial success of organisations, not least because it is now key criteria for investors and lenders.
Many employees now expect their employer to be able to display a commitment. A recent study concluded emphatically that companies with highly satisfied employees have, on average, 14 percent higher ESG scores than the global average. So it is important to get it right.
This article gives a broad overview of what ESG means in an employment context, and things that employers will need to consider implementing to show their commitment to ESG.
Environmental criteria
There are many steps that employers can take to show commitment to being environmentally friendly, some examples of which are listed below.
First, offer incentives to encourage sustainable commuting (e.g., an allowance to buy bikes) and sustainable holiday travel (e.g., an extra day’s holiday or cash for those travelling by rail rather than flying).
Second, introduce agile working practices to reduce carbon footprint by cutting out the commute.
Third, help employees to be more sustainable in their day-to-day lives by, for example, asking them to turn off their computers at the end of the working day and other ‘easy wins’.
Fourth, give staff the option of investing their workplace pension contributions in ESG titled funds that have a positive impact on people and planet.
Fifth, develop a bank of easily accessible resources on environmental practices, for example through the introduction of a ‘green handbook’.
Finally, partially fund otherwise unpaid career breaks if the individual is undertaking volunteering activities for an environmental organisation.
Social criteria
An important element of sustainability is taking into account social considerations. These are often more challenging to implement and to measure but there are many ways that employers can demonstrate that they take social factors seriously.
A key part of this is a commitment to valuing staff welfare, so employers could: (i) ensure there are up to date equality, diversity and inclusion policies and training in place; (ii) review staff work/life balance and consider introducing or extending agile working practices to enable greater flexibility to work from home for those with caring or other responsibilities; (iii) ensure equality, diversity and inclusion policies are up to date and provide staff training; (iv) provide access to health and wellbeing support (including mental, physical and financial wellbeing) and offer training to staff on how to help colleagues with wellbeing issues; (v) ensure there are appropriate systems so that any incidents of discrimination, harassment or bullying are dealt with in a timely and effective way; (vi) encourage staff to get involved in charitable activities or community work (this could be separately rewarded or acknowledged as part of an appraisal process); (vii) review and update the policy and approach to employee engagement; and (viii) prioritise changes to improve working conditions for staff and adopt policies in line with the Modern Slavery Act 2015, even if not legally required to do so.
Governance criteria
A genuine commitment to governance means much more than compliance with legal requirements. It involves complying with the spirit of the law and voluntarily adopting what is considered good practice.
Some of the steps employers can consider when developing their governance include: (i) adopting codes of conduct promoted by the government or well-respected bodies; (ii) being alive to conflicts of interest and ensuring there are strong and clear policies to identify and manage conflicts when they arise; (iii) ensuring ongoing board diversity and putting in place systems to achieve future diversity goals; (iv) ensuring policies and practices are in line with the Bribery Act 2010; (v) ensuring the whistleblowing policy is accessible and up to date so that staff can easily raise any concerns about malpractice in the workplace; (vi) voluntary reporting (e.g., ethnicity pay reporting) to demonstrate the importance the organisation accords to improving fairness and diversity; and (vii) adopting clear and transparent remuneration policies.
Impact of the pandemic
The coronavirus (COVID-19) pandemic has acted as something of a catalyst in bringing certain elements of the ESG agenda to the fore. Many employers have adopted agile working policies and, in doing so, have facilitated a more diverse workforce by enabling and encouraging those with disabilities who may have previously struggled with a work commute and office set up, to work more effectively. Employers have been forced to adopt more flexible working practices, and this has allowed many employees to fit family commitments around their working day in a way that they would previously have been unable to.
Something which has also changed is that employers now have an enhanced awareness of mental health. The pandemic was a challenging time for many, and lots of people suffered, and continue to suffer, from mental health issues. Employers have had to react to this and put in place support mechanisms to help their employees cope. Along with this increased awareness of the ill effects of mental health problems and the measures which can be put in place to alleviate them, employers have found that there is a renewed focus on employee wellbeing.
Many employers are now putting tailored wellbeing strategies in place. An effective strategy will need to go far beyond a series of standalone initiatives. It will cover health (both physical and mental) and the fostering of a good work environment with an open and inclusive culture, a fair and transparent remuneration process, a good work/life balance and an emphasis on job satisfaction.
Moreover, an employer should set out its values and ethical standards, including corporate social responsibility and community investment, as well as inclusion and diversity. Employees should be given the opportunity to develop their careers via mentoring and coaching opportunities, and financial wellbeing should also be incorporated into the strategy via retirement planning, flexible benefits schemes and employee financial support.
The future of ESG
The importance of ESG has already evolved so that many of the concepts have become legal requirements. For example, outside the employment context, there is a raft of new legislation on climate change. Within the employment context, there are also various pieces of legislation (for example, the Bribery Act 2010 and gender pay gap reporting requirements under the Equality Act 2010) which put ESG consideration on a legal footing.
However, this area is ripe for further evolution, and it is likely that, over time, there will be many more mandatory requirements on employers to make them act responsibly and sustainably. In the meantime, there are lots of steps forward-thinking employers can take to demonstrate strong ESG credentials. While these are largely voluntary for now, they will pay substantial dividends in terms of employer reputation, attracting and retaining staff and workplace satisfaction and productivity, as well as having a positive long-term impact on the financial success of the organisation.
Emma Burrows is a partner and head of employment at Trowers & Hamlins. She can be contacted on +44 (0)20 7423 8347 or by email: eburrows@trowers.com.
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Emma Burrows
Trowers & Hamlins
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