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Three-part series: ESG and employment law – what this means for your organisation: Part 1 – Environmental

This article is part 1 in a three-part series exploring ESG and employment law, this article focuses on the ‘Environmental’ element. In parts 2 and 3 of the series, we look at the ‘Social’ and ‘Governance’ aspects.

What is ESG and why should you care about it?

‘ESG’ (environmental, social and governance) serves as a framework that helps stakeholders analyse the sustainability of a company and its operations. Whilst ESG was originally a focus for investors to measure a company’s sustainability, wider stakeholders are becoming more engaged and interested in ESG as a measure of a company and its aims. Investors, employees, consumers and regulators have an increased expectation that businesses run their operations responsibly and sustainably.

ESG helps to shine a light on the ethics of a business to the external world, and having a strong ESG agenda can increase productivity and profitability and enhance a company’s reputation. As we explore in further detail below, research suggests that – particularly for Gen Z and millennial employees – a company’s approach to environmental and social issues plays a key part in attracting and retaining talent and there is increasingly an expectation from employees that their company will take action relating to such issues. Given the competitive job market and the drive to retain top talent, ESG should be high on the agenda.

This first article in our three-part series will focus on the ‘environmental’ element of ESG.

How is employment law related to your company’s ESG credentials?

Part 1: The ‘E’

The environmental aspect measures an organisation’s impact on the natural environment. It accounts for things such as the company’s carbon footprint, its use of natural resources, its waste, and the impact of its operations on the physical environment.

Many organisations are actively working to reduce their carbon emissions and honing their operations to reduce environmental impact. Whilst there’s no doubt that a focus on the environmental aspects of a business will involve looking at its physical sites and operations, there is a less-obvious employment angle to this too, which can have a significant part to play.

Employers are being subjected to increased regulation regarding their environmental habits. The government has imposed requirements for certain large companies and LLPs to make mandatory climate-related financial disclosures in their annual reports. The Competition and Markets Authority (CMA) has launched a number of investigations into ‘greenwashing’ made by fashion brands in the UK. Indeed, other regulators are also taking action: the Financial Conduct Authority has sought to tackle ‘greenwashing’ and other false sustainability claims by setting out proposals for new sustainability disclosure requirements in relation to investment products – these are just a few examples.

However, how does this additional regulation relate to employment and HR issues? Well, first, the law on whistleblowing protects workers who raise certain concerns, for example concerns regarding their employer damaging the environment, breaching their legal duties (i.e. environmental or regulatory in this context) or deliberately concealing any of those matters. Provided a whistleblower meets the statutory test for raising a ‘protected disclosure’, they cannot be subject to any detriment or dismissed for making that disclosure.

It’s likely that environmental whistleblowing will become an increasingly prevalent concept with which employers have to grapple. A 2022 Deloitte survey suggests that Gen Z’s and millennials are extremely concerned about the climate crisis and want their employers to do more to fight climate change, and indeed many of them have put pressure on their employers to take action. As such, this is an area which will need to be on an employer’s radar and work may need to be done to ensure its whistleblowing policy is fit for purpose.

It is easy to see how an employee who has genuine concerns about their employer’s environmental practices or sustainability claims may be afraid to speak out for fear of reprisals. However, having an effective whistleblowing policy, as well as fostering a workplace where employees feel empowered to challenge and raise concerns internally, can allow businesses to address these concerns at an earlier stage, rather than wait for them to be exposed by the public or regulators and be subject to intense public scrutiny. The negative exposure generated by allegations of greenwashing can have a hugely detrimental impact on reputation and, ultimately, share price/company value. As such, it makes good business sense to ensure that internal policies explicitly cover issues around environmental damage and breaches of environmental or regulatory duties. For certain firms in the financial services sector, there’s a regulatory requirement to appoint a senior manager or director (often a non-executive director) as a ‘whistleblowers’ champion’ to oversee the effectiveness of internal policies and prepare an annual report to the board. Indeed, many companies elect to appoint a whistleblowing champion, even if there is no regulatory requirement, as a matter of good governance and to ensure that an individual has executive responsibility to oversee the integrity and effectiveness of internal policies. For employers who are particularly climate conscious, policies could actively encourage employees to speak up about climate issues and hold the company to account. In addition, tailored training to all staff – and more detailed, targeted training to those in management positions – should also be delivered so that they can identify what whistleblowing looks like and how to respond appropriately.

Another overlap between employment law and the environment can be seen in discrimination legislation. Under the Equality Act 2010, individuals such as job applicants, employees and workers are protected against discrimination, harassment and victimisation relating to their religious or philosophical belief. What counts as a ‘philosophical belief’ has been the subject of intense debate in recent years, but it is possible that a strong belief in protecting the environment and tackling climate change could potentially be seen as a protected ‘philosophical belief’.

There is a stringent test to be met: to summarise briefly, the belief must be genuinely held and must be a belief (not just an opinion or viewpoint) as to a weighty and substantial aspect of human life, have a certain level of cogency, seriousness, cohesion and importance and be worthy of respect in a democratic society. One can certainly see how a belief in climate change could meet these criteria. Indeed, in a case decided prior to the Equality Act 2010, it was found that an individual’s belief in man-made climate change, and the alleged resulting moral imperatives, was capable of being a philosophical belief for the purpose of the Regulations at the time. In a more recent case under the Equality Act 2010, an Employment Tribunal has found that ‘ethical veganism’ can amount to a protected philosophical belief.

Businesses therefore need to be alert to the fact that staff who are particularly climate conscious may actually be protected under discrimination legislation. To protect the company and reduce legal risk here, employers should be providing staff with training on the Equality Act duties, as well as their internal equality policy, to highlight the wide definition of ‘philosophical beliefs’ and ensure managers are able to deal appropriately with climate-conscious employees and avoid discriminating against them.

Although the legislation mentioned above offers some legal protection to workers in relation to environmental issues, it is encouraging to see a number of employers starting to embrace climate conscious policies and practices, perhaps due to a need to attract and retain staff who are seeking a values-driven employer. Many companies are now taking steps to reduce the impact of their operations on the environment through a range of policies, such as:

  • Sustainable commuting – offering incentives or schemes to entice staff to walk or cycle to work or use public transport. This could also encourage the use of homeworking to avoid the commute, but require home working practices to be sustainable (e.g., by prohibiting single-use office supplies, encouraging the use of renewable energy etc.).
  • Expenses – where travel is necessary, encouraging staff to use more sustainable methods of travel by only reimbursing certain types of expenses and/or requiring an employee to get prior approval before booking travel arrangements.
  • Disciplinary rules including environmental misconduct – if a company has a net zero commitment or a strong environmental ethos, it may wish to include specific examples of environmental misconduct matters which will be dealt with under its disciplinary policy. For example, a disciplinary policy could expressly make it an offence for an employee to act in a manner which is damaging to the company’s reputation as an environmentally conscious business.
  • Training – offering environmental and sustainability training programmes could help raise awareness and encourage organisation-wide change.
  • Career break – allowing staff paid or unpaid time off work for a short period to volunteer with environmental organisations. A ‘light touch’ version of this may be giving employees a paid day off work to volunteer with a climate change or environmental charity.
  • Remuneration linked to ESG outcomes – linking bonuses or variable income to environmental goals such as lowering carbon emissions can be an effective tool to incentivise executives and reward long term, sustainable decision-making. Over half of FTSE 100 companies now include ESG measures as part of their executive incentive plans to drive change and encourage long-term, sustainable decision making.

Although it is easy to think of this as an ‘HR’ issue, organisations who truly want to see organisation-wide, cultural change, will need to drive this from the top. Whilst HR can certainly play a key part in strategy and implementation, senior leaders will need to embrace the company’s ESG agenda and take ownership of the vision to help deliver genuine change. While the policies listed above are a very helpful starting point, this must be backed up by action to demonstrate a genuine commitment to environmental change and sustainability.