ESG in the workplace: what is it and why is it important?

Ten years ago I don’t think I could have told you what was meant by “ESG”. Fast forward to today and there is a real drive to embrace and champion workplace ESG.

ESG refers to the Environmental, Social and Governance impacts of an organisation. Traditionally, ESG criteria were something considered by investors when deciding in which companies to invest. Now, a company’s approach to ESG often forms a central part of its vision, strategy and values.

In this two part series on ESG, we look first at what ESG means in an employment context and why it is important. Next week we provide practical tips on how employers can put ESG into practice.

ESG in the workplace

From an employment perspective, the “S” and “G” in ESG tend to be the most relevant, with (broadly speaking) social referring to how a business manages its relationship with its employees and workers, and governance referring to how it approaches its leadership, decision-making and internal practices.

There is inevitably an overlap between the criteria, and it isn’t necessarily helpful to categorise initiatives exactly. Instead, here is a summary of some of the key areas where ESG can be of general relevance in the workplace:

• 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 / national living 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?

Why is ESG important for employers?

As well as a moral imperative for promoting workplace ESG, here are some practical reasons why it can be of value to employers:

Reputational consequences

Businesses seen to be failing in respect of their ESG could well face criticism, negative publicity and reputational damage. Just look at the PR disaster faced by P&O following its recent firing of 800 workers: the marketing press described its brand as having “nosedived” as a result.

I interned with an NGO aimed at tackling issues of human trafficking and forced labour in global supply chains. In many cases, social impact and good governance were not respected, with issues including confiscation of migrant worker passports, unjustified salary deductions and forced or child labour. These examples might seem extreme in the UK, where we do not generally come up against such issues, but for multinationals with global supply chains, often operating in developing countries, the potential risk is real. Just think of Boohoo accused of modern salary in its Leicester supply chain to understand the negative consequences.

It is however equally important that any ESG claims made by companies are accurate. The term “greenwashing” refers to companies that make false or misleading claims about their ESG. A quick Google search throws up numerous examples where companies have been exposed as greenwashing and have suffered negative PR consequences as a result (McDonald’s so called “environmental” paper straws spring to mind, which turned out not to be recyclable).

Legal consequences and global standards

There is already legislation which gives ESG a legal basis in the workplace; to name but a few: the Equality Act 2010, the Human Rights Act 1998, the Bribery Act 2010, the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017, Modern Slavery Act 2015… 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.

Increasingly, companies are also having to pay heed to legislation which may have extra-territorial reach. There are also global standards such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises which set expectations for businesses to respect all internationally recognised human rights regardless of geographical location. 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

As an employment lawyer, I can’t help but feel the relevance of ESG to creating a happy and positive workforce.

You don’t just have to take my word for it. A 2021 Edelman study 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. A Marsh & McLennan report also found that “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.

For instance, in 2021, shareholder revolts against executive remuneration were up 56 per cent on 2020, with many shareholders signalling that they expected executives to share the pain experienced by workers on furlough or reduced pay because of the pandemic. Similarly, last year the Investment Association issued an “amber-top” warning to the biggest 350 listed firms to improve ethnic and gender diversity on boards.

Improved performance

ESG makes financial sense: according to a 2019 report by McKinsey, 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.

It is clear that ESG awareness and compliance can lead to many competitive advantages and opportunities for companies. Next week, we look at how companies can go about implementing ESG in the workplace.

If you require further information about anything covered in this blog, please contact Alice Parker, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2022