Environmental, social and governance issues (ESG) - why is it important for employers?
The strongest businesses are those fit for the challenges of today but crucially with the flexibility, strength and resilience to thrive whatever the future may bring.
More and more businesses are seeking to achieve this through a greater understanding and a root-and-branch review of their organisation's impact on its people, on communities and society, and on the planet.
Environmental, social and governance (ESG) are three main standards that provide a comprehensive view of the sustainability and societal impact of a business. More and more companies are reporting on their sustainability metrics.
So, why is ESG important for employers? With challenges such as climate change and a societal push towards greater equality and diversity, employers are expected to drive change and have a sustainable business strategy. On top of that ESG is increasingly driving the financial success of organisations because it has become a key criteria for investors and lenders.
Many employees also 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's important to get it right.
This bulletin gives a broad overview of what ESG means in an employment context. But it is just the starting point. Keep an eye out for more as we launch our series of updates on how employers can develop a meaningful ESG strategy for staff to prepare themselves for the future of work.
There are lots of steps employers can take to show commitment to environmentally friendly practices. Below are a few examples:
- Offer incentives to encourage sustainable commuting (eg an allowance to buy bikes) and holiday travel (eg an extra day's holiday or cash for those travelling by rail rather than flying)
- Introduce agile working practices to reduce carbon footprint by cutting out the commute
- Help employees 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"
- Give staff the option of investing their workplace pension contributions in ESG titled funds that have a positive impact on people and planet
- Develop a "Green Handbook" which includes a bank of easily accessible resources and staff policies on environmental practices and issues
- Partially fund otherwise unpaid career breaks if the individual is undertaking volunteering activities for an environmental organisation
An important element of sustainability is taking into account social considerations. These can be more challenging to implement and measure, but there are many manageable ways in which employers can demonstrate that they take social factors seriously. A few examples are below:
- Ensure equality, diversity and inclusion policies are up to date and provide staff training
- Review staff work/life balance and consider introducing or extending agile working practices to enable greater flexibility for those with caring or other commitments
- 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
- Ensure there are appropriate systems so that any incidents of discrimination, harassment or bullying are dealt with in a timely and effective way
- Encourage staff to get involved in charitable activities or community work - this could be separately rewarded or acknowledged as part of an appraisal process
- Review and update the policy and approach on employee engagement
- 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
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 steps employers can consider when developing their governance are below:
- Adopt codes of conduct promoted by the government or well respected industry bodies
- Be alive to conflicts of interest and ensure there are strong and clear policies to identify and manage conflicts when they arise
- Ensure ongoing board diversity and put in place effective systems to achieve diversity goals
- Ensure policies and practices are in line with the Bribery Act 2010
- Ensure the whistleblowing policy is accessible and up to date so that staff can easily raise any concerns about malpractice in the workplace
- Consider voluntary reporting (eg ethnicity pay reporting)
- Adopt clear and transparent remuneration policies
Where next for ESG?
The importance of ESG has already evolved so that many of the concepts have become legal requirements. For example, outside of the employment context, there is a raft of new legislation on climate change. Within the employment context, there is also legislation which puts ESG considerations on a legal footing (for example, the Bribery Act 2010).
However, this area is ripe for further evolution, and it's likely that over time, there will be many more mandatory requirements on employers to make them act more responsibly and sustainably. In the meantime, there are opportunities for forward thinking employers to take steps to demonstrate strong ESG credentials. The evidence suggests these steps 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.