By Amy Shabacker Dufrane
Environmental, Social and Governance (ESG) issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report. For the first time, ESG criteria was required to be part of the financial evaluations of companies, an effort to develop sustainable investments. In other words, the emphasis on ESG was initially driven by investors – mostly major institutional investors – and a global survey of 475 institutions found that 68 percent say an ESG strategy has significantly improved returns.
Fast-forward to 2022 and frameworks for ESGs have moved beyond the boardroom into the workplace. The impact of a well defined ESG program can be measured and reported, albeit some aspects better than others. For example, attempts to accurately report greenhouse gas emissions and climate risks can be thwarted by other variables. But there’s one part of the ESG that can be indisputably reported: the Human Capital – the social – part of an ESG.
First, let’s look at what’s typically reported in this category:
- Gender pay equality, specifically the ratio of salary and renumerations of women to men
- Diversity and inclusion, the percentage of employees by age, gender, race, etc.
- Wage levels, such as paying a living wage
- Learning and development as they relate to employee turnover rates
- Culture initiatives, including volunteering, internships and STEM programs
This level of potential organizational change might appear overwhelming, especially given what’s already on HR’s plate. Further complicating ESG projects is the dearth of qualified talent to help lead sustainability efforts, collaborating with stakeholders across the business. Regardless, a solid commitment to an ESG has become an employer branding and talent retention requirement. The majority of the workforce – millennials and GenZ – especially value the issues espoused by ESGs.
The EY 2022 Work Reimagined Survey reflected on what employees value, from pay to purpose. An employer’s purpose and culture, as well as their sustainability goals – were stated reasons why an employee might change jobs. Yet, employers didn’t cite the same responses when asked how they ensure employees thrive in a new work experience. And 20 percent of employees perceived pay equity as the single most important action a company should take to improve DE&I. In contrast, the largest number of employers (17 percent) cited reviewing hiring criteria as the most important action to take. Could the ESG gap between reality and expectations be that significant between employer and employee?
For an ESG to succeed, organizations need to put forth measurable standards and reliable reporting. Transparency is the cornerstone of an effective ESG, requiring defined taxonomies that include which data can be regularly measured. For example, reporting on pay equity before putting a plan in place to fix pay inequality isn’t going to be well received by the workforce, especially since pay remains the primary means of attracting and retaining the best talent.
Pay being obvious, there are other aspects of the ESG that are important to employees. Corporate social responsibility programs can enable a company to shine within the broader ecosystem of its community and industry. Examples include addressing corporate social justice experiences lived by groups disadvantaged by society. A stated purpose such as Danone’s bringing health through food revolution can energize a workforce, creating a culture of caring behind a high-profile cause.
According to research by McKinsey, when companies “give back” employees react with enthusiasm. This strong sense of purpose has become even more important post-pandemic, a period during which employees are evaluating the integration between work and life. Further findings from McKinsey underscore that when employees sense alignment with the organization’s purpose, benefits such as stronger employee engagement, heightened loyalty and a greater willingness to recommend their employer to others abound.
What doesn’t work when it comes to a successful ESG? Vanity projects such as the CEO’s favorite cause, hallway posters or vacuous platitudes in the annual report. Embracing human rights including #metoo and #blacklivesmatter, human resource development, pay transparency, and workplace safety are tangible examples of material changes that the “S” in ESG can make in the workforce.
It’s the time in the year when we reflect on our personal and professional accomplishments. HR’s role remains one of the most challenging – and most gratifying – in terms of organizational influence. As we plan for success in what could be unpredictable times in 2023, I urge all of us to shine a light on ESGs and how they can do more to ensure a positive employee experience.
