The intersection between employment and ESG

While employment related matters are typically considered to fall within the social aspect of ESG, there are some issues that straddle both the social and governance elements of ESG. In this article we focus on two topical employment issues from an ESG perspective – diversity and inclusion and whistleblowing. 

Introduction

Employment related matters are becoming an increasingly core focus from an ESG perspective. For employers, it can cover broad issues such as diversity and inclusion, pay transparency, workforce engagement, whistleblowing, human resource policies, organisational culture and health and safety to name but a few. In fact, it could be argued that all employment law comes within the scope of the social component of ESG.

Therefore, it is becoming increasingly important for employers to ensure that they comply with new legislation and new standards. Otherwise, employers will not only face standard regulatory risks but they may also be exposed from an ESG perspective. Indeed, many employers who are particularly ESG conscious are seeking to go further than the statutory employment law minimums.

In recent years a large number of legislative changes (both at a domestic and EU level) designed to improve employee rights and security have been made.  This flow of legislative change is unlikely to abate anytime soon as the EU Social Taxonomy Report proposes a system to classify what constitutes "decent work". This includes pay transparency, paying the living wage, decent working hours, formal working relationships, equal opportunities, reduction of pay gaps and job creation for young people. With this in mind, it is inevitable that further employment legislation and disclosure requirements are likely to flow from the EU social taxonomy when that is developed over the coming years.

In this article, we will focus on two of the most topical current employment issues from an ESG perspective, diversity and inclusion and whistleblowing, before touching upon some other relevant recent and impending legislative changes.

Diversity and inclusion

Diversity and inclusion has in recent years generated significant media attention. Positioning the promotion of an inclusive culture at the forefront of a company's business outlook is undoubtedly the way forward for businesses keen to secure a fully-rounded ESG strategy. 

The fact is that diversity makes good business sense. Ethnic, gender and cultural diversity in management has been shown to boost business and is linked to both profitability and value creation. Put simply, a homogenous workforce is unattractive to potential employees, customers and investors alike.

Diversity and inclusion is an area that straddles both the social and governance aspects of ESG.  From the social standpoint there are huge expectations on companies from employees, business partners and investors to have a strong focus on diversity and inclusion in the workplace. This is particularly the case amongst the younger generations of workers who are increasingly assessing employers' diversity and inclusion credentials when weighing up employment options.

Diversity and inclusion is also being driven from a governance perspective, mainly through the introduction of mandatory gender pay gap reporting for larger employers in Ireland for the first time last year. The Gender Pay Gap Information Act 2021 required employers to publish details of the mean and median hourly pay and bonuses for men and women, the percentage of men and women receiving bonuses or benefits-in-kind, explanations for any gender pay gap that arose, and measures they will take to eliminate or reduce this gap.  The implementation of the Act has commenced on a phased basis. Currently in Ireland, only employers with 250 or more employees have to publish gender pay gap reports - but by 2025, this threshold will drop to just 50 employees.

There is due to be further legislative development in this area as the recently agreed Pay Transparency Directive (the ''Directive'') will soon require the further expansion of statutory obligations on employers in Ireland in respect of gender equality.

Under the current gender pay gap requirements, employers are required to report the average pay of male and female workers, which already complies with the basic requirements of the new Directive. However, this assessment is based only on the overall workforce, split into part time and full time workers. Under the Directive, companies will additionally be required to report the disparity of pay between genders, based on categories of workers, who are doing the same work or work of equal value. Member States will be required to establish clear criteria to assess and compare what qualifies as value for work in line with a set of objective criteria, which include educational, professional and training requirements, skills, effort and responsibility, work undertaken and the nature of the tasks involved.

One of the other key provisions of the Directive is the concept of a ''joint pay assessment,'' which will require a company to carry out an assessment where a gender pay gap report identifies a gap of at least 5% in any category of work and where that gap cannot be justified based on gender-neutral factors.  Under the Directive, additional pre-employment provisions will also be implemented, whereby employers will now be precluded from inquiring as to an applicant's salary history, while also obliging companies to disclose the initial pay range for the advertised role.

While Irish legislation has not yet been drafted or initiated, the implementation date of the Directive is expected in 2024.

Whistleblowing

The Protected Disclosures (Amendment) Act 2022 came into force on 1 January 2023. This Act transposes the EU Whistleblowing Directive (2019/1397) into Irish law and amends the Protected Disclosures Act 2014 to enhance and strengthen protections for whistle-blowers. The amendments to the whistleblowing regime are wide-ranging and careful consideration of same is required so as to ensure that there is a compliant process in place for the reporting and investigation of protected disclosures.

The investigation of whistleblowing complaints is an area which, owing to the legislation in place, clearly has governance ramifications from an ESG perspective. However, it also goes hand-in-hand with the social aspects of ESG in that poor working cultures can be breeding grounds for poor working practices leading to issues such as whistleblowing complaints, absences and stress. Having a culture that encourages employees to speak up about potential wrongdoings in the workplace in the knowledge that they will be dealt with appropriately is the best way of managing the business and reputational risk that can result from the mismanagement of whistleblowing complaints. 

Concluding remarks

In summary, employment solicitors are witnessing increasing client demand for advice on how employment practices and policies can support their ESG framework. This will undoubtedly continue to be the case as any company seeking to develop a first rate ESG programme must focus on its employment practices. With the introduction of the Corporate Sustainability Reporting Directive, in scope companies will be required to reporting on a wide range of environmental, social and governance issues within their annual reports in line with the European sustainability reporting standards. These standards, currently in draft, contain relatively broad disclosure requirements in relation to employment related issues which we anticipate will also lead to increased focus on a company's employment practices and policies.  

For more information in relation to this topic, please contact Noeleen Meehan, Partner, Éinde O'Donnell, Senior Associate or any member of ALG’s Employment team.

Date published: 30 March 2023