What is ESG?

ESG is a collective term that stands for environmental, social and governance. It is a framework that helps stakeholders understand how an organisation impacts society and the environment, as well as how transparent its governance is. 

What are some of the key areas where ESG can be relevant in the workplace? The environmental component of ESG focuses on how organisations can limit their impact on the environment. In the 21st century, the impact of climate change has become one of the most pressing issues facing our planet. The Climate Change Act commits the UK government to reducing greenhouse gas emissions by at least 100% of 1990 levels by 2050. To help achieve this target, many organisations are already taking steps to improve their environmental business practices. Examples include using renewable energy sources, using sustainable packaging, switching to LED lighting and encouraging recycling. HR policies and practices could take this a step further by, for example:

• introducing electric vehicle salary sacrifice schemes and workplace charging points;
• offering vegan meals or at least vegan alternatives in staff canteens; and
• offering an extra day's holiday for choosing not to fly when travelling.

The collaborative initiative, the Chancery Lane Project, is pushing the boundaries by sharing example contractual provisions with a climate solution focus, including in relation to employment contracts and policies.  Whilst not yet mainstream among People teams, these "green clauses" provide inspiration and examples of steps employers can take to engage their workforce in transforming the organisation's approach to environmental issues.  

The social component of ESG focuses on promoting equality and fairness, both within the workplace and in society more widely. It means being a responsible and inclusive employer: ensuring there is a healthy workplace culture, promoting equality with diversity and inclusion initiatives, and taking active steps to facilitate flexible working practices as much as possible. We are seeing more employers focus on social mobility as part of their inclusion strategy and start to offer apprenticeships, work experience and mentoring opportunities. There is also a trend towards developing employee networks for those experiencing menopause or perimenopause, or for neurodiverse employees, to complement longer established networks for women, those from ethnic minorities and those identifying as LGBT+. 

The social component also involves being a socially responsible employer. Organisations can make a positive impact on society more widely by investing in local community projects and donating time and/or raising funds for local causes. 

The governance component of ESG focuses on an organisation's transparency with its stakeholders regarding decision-making and reporting. Good governance practices include accurate reporting on financial performance and business strategy and, from an HR perspective, diversity in leadership teams, openness about executive pay and ensuring ethical practices are followed. It also includes preventing abuse within supply chains, such as modern slavery, and having in place strong whistleblowing policies and procedures. In a similar vein, COVID-19 has brought health and safety policies into sharper focus. Health and safety obligations also sit under the governance umbrella.

Why is ESG important from an HR and employment law perspective?

Investors and clients are increasingly using ESG factors to evaluate organisations. Research by Charles Stanley found that 48% of UK investors are looking to increase their ESG investments within the next three years. In 2021, US$2 trillion was invested in ESG-labelled funds. These figures will only increase as our younger population becomes more focused on sustainability – Butterfield Mortgages Limited found that 48% of young people aged 18-34 plan to make ESG investments by 2025. Clients are also increasingly favouring ethical brands – research by McKinsey found that more than 70% of people said they would pay an additional 5% for a green product if it met the same standards as non-green alternatives. 

Research from Axioma shows that organisations that embrace ESG standards outperform their competitors in the long term. Aligning HR policies and practices with ESG strategy will help to promote long-term sustainable growth and inclusion. ESG performance is also becoming increasingly important for organisations' employees. Research by Marsh McLennan indicates that employee satisfaction is higher in organisations that have significantly higher ESG scores than their peers. Satisfied employees work harder, stay longer and seek to produce better results for that organisation as it gives meaning to the work employees carry out.  There is also a clear trend towards greater employee activism, as seen with the Black Lives Matter and #MeToo movements. As a result, ESG performance might also help organisations attract talent. In the next decade, 72% of the world's workforce will be made up of Millennials and Gen Z who place greater importance on environmental and social concerns than their predecessors. In a KMPG report, it was found that more than half of 18-24 year-olds will weigh up a firm's ESG credentials as a reason to accept or decline a role.

How can organisations embed ESG?

Claire England, our Head of Responsible Business, recommends four steps to ensure the ESG framework is embedded into your strategy:

Board level sponsorship – the core role of an organisation's board is governance and this is key to championing ESG.  The board should identify sustainability issues that are material to the organisation and then ensure they are monitored and managed. In leading from the top and sharing a key vision for ESG initiatives, the board can set the tone and inspire colleagues throughout the organisation to ensure that everyone plays their role. 

Make ESG ambitions public – in publishing your ambitions, you set a public expectation of making progress. This holds you to account and encourages regular reporting on the steps you are taking to achieve your targets. Using external platforms such as EcoVadis can help assess corporate social responsibility and sustainable procurement to find gaps in your organisation's sustainability which may help provide a roadmap to improvement.

Change habits and embrace change – it is important that employees are passionate about your organisation's impact on the climate and the environment. In actively making greener choices, from increasing recycling to taking a train instead of flying, having a positive outlook on embracing change helps your organisation contribute to your long-term ESG targets.

Prioritise and have a clear strategy – in an impact assessment, organisations should consider materiality. According to the Global Reporting Initiative, materiality includes topics that have a direct or indirect impact on organisations' ability to create, preserve or erode environmental and social value for their stakeholders and society at large. In prioritising ESG initiatives that are achievable, you are more likely to be successful with your targets. At Dentons, we use the UN's Sustainable Development Goals to prioritise initiatives where we could make the largest impact. For example, we have targeted our efforts on reducing inequalities by renewing our race action plan to create a specific career development programme for our ethnically underrepresented colleagues, and developed racial inclusion training to cover racial blind spots.

If you would like any advice on HR's role in your ESG strategy, or how to support your employees, please contact a member of our team.