How companies can manage that not-so-silent ‘S’ in ESG

This article was first published in the Irish Independent, 20 October 2022.

The ‘S’ in ESG is arguably the hardest of the three pillars of “environmental, social, governance” to articulate and quantify. This is in part due to the understandable prominence of the environmental limb of ESG and the fact that the governance dimension of ESG has long been talked about which often results in the perception that the social element is somehow less important.

Environmental issues for instance are concrete, relatable, measurable, and indeed existential. One only has to look back to the weeks after COP26, when the Central Bank Governor wrote to regulated firms setting out its expectations around climate change and other sustainability issues. The letter prompted quite a lot of discussion and action but given its focus on climate change and the stewardship role of boards, less so on the ‘S’ than on the ‘E’ and the ‘G’.

S&P, one of the leading ESG ratings agencies, defines the ‘S’ pillar in terms of the social factors that pose a risk to a company’s financial performance. This manifests itself in two ways: firstly, how a business treats and interacts with the people it employs and secondly, how it treats people in wider society.

There has been discussion at a European level about establishing a Social Taxonomy similar to the EU’s “green taxonomy”.

However, defining a Social Taxonomy would be much more political.

Trying to find a workable definition for objectives like decent work, adequate living standards, or inclusive communities across 27 member states is extremely challenging. This could explain why we do not have a codification, and why we are unlikely to have one in the near future.

However, the lack of a robust European framework should not serve as an excuse to shirk responsibilities.

For example, although employers in Ireland are already subject to a wide range of employment legislation, providing a framework of minimum rights for employees, the ‘S’ in ESG involves going beyond minimum legal compliance to implementing policies and practices that promote a positive workforce culture and environment. The pandemic has turned the focus firmly on this social element.

Over the last two-and-a-half years, we have seen a growing public expectation for companies to ‘do the right thing’ by their workforce.

As a result, the HR agenda has moved up the list of boardroom priorities and companies have had to place increased focus on the social aspects of their ESG strategies.

One of the priority items currently is the enactment of the Right to Request Remote Working Bill 2022, which will provide a legal framework around which requesting, approving or refusing a request to work remotely can be based.

Once enacted, the legislation will likely require employers to have a policy in place outlining how remote working requests are to be made and decided upon.

Staying with the theme of remote and flexible working, the second piece of legislation that employers should be aware of from an ESG standpoint is an EU Directive on work-life balance that will introduce a range of new family-friendly rights for parents and carers, including a right to request flexible working for employees with children up to the age of 12 and those with caring responsibilities.

A third piece of legislation employers should factor into their agendas is the EU Directive on transparent and predictable working conditions, which will seek to further employees’ rights by providing an entitlement for employees to request a transfer to more predictable and secure working conditions where available.

This legislation will also seek to limit probationary periods to six months and ban exclusivity clauses in contracts of employment.

But of course, the employment aspects of ESG are not just about how employers have responded to the pandemic. There can be a number of other HR-led initiatives a business can implement to support the social aspects of their ESG strategies.

By way of example, a formalised and well managed Diversity, Equality & Inclusion Policy with the correct policies and procedures to support and promote a diverse and inclusive organisation, is an imperative.

Getting this right can help your organisation thoroughly embed a social culture.

The recent introduction of mandatory gender pay gap reporting in Ireland for the first time will require employers with 250 or more employees to publish the gender pay and bonus gap for their workforce, to identify the cause of any gap and outline their plans for addressing it.

These reporting obligations will eventually extend to companies with 50 or more employees.

Gender pay gap reporting blends a social action with measurable standard. It is a practical measure companies can take as part of their broader DE&I strategy, and it will also provide a quantifiable metric for ESG reporting purposes. Gender pay gap reporting represents an opportunity for organisations to enhance their ESG efforts.

Those organisations that demonstrate meaningful progress in this area will deliver a powerful message in terms of improving the gender pay gap and its broader social impact.

Another increasingly important area to invest time and energy into is in relation to pay equity issues, including discussions around what constitutes living wages and fair wages for employees. This is the latest ESG challenge to present itself to employers in light of rising inflation rates and the rapidly escalating cost of living.

From all these conversations, we can start to clearly identify increasing public focus on and expectations for what constitutes ethical and sustainable business practices from a social perspective. This can often create a very interesting intersection between the ‘S’ and ‘G’ components of ESG.

A strong recent example for this when it comes to remuneration has revolved around executive pay.

While there are rules regulating this area in the financial services sector, an ESG perspective requires considering what society’s expectations are of companies when it comes to executive pay and what may be regarded as acceptable or unacceptable behaviour beyond what the legal framework states as right or fair.

We saw this come into sharp focus during the pandemic, where there was an expectation amongst employees and the public at large that all levels of the workplace hierarchy should ‘share the pain’ and with cases of strong criticism towards leadership when those public expectations were not met.

Today’s rapidly evolving expectations and guidelines on ESG require businesses to stay alert. Harder to define social concepts often deal in grey areas which, if not managed, could result in serious reputational challenges.

Laura Mulleady is a partner in A&L Goodbody’s insurance practice and chair of the firm’s ESG Steering Group.

Noeleen Meehan is a partner in A&L Goodbody’s Employment Law Group.

Date published: 21 October 2022