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Three-part series: ESG and employment law – what this means for your organisation: Part 2 – Social

In our previous article, we looked at the ‘environmental’ aspect of ESG and its relationship with employment law. This article focuses on the ‘social’ element. Click here to read part three which explores the ‘Governance’ element.

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

Part 2: The ‘S’

The social aspect measures how a business treats people: not only its own employees, but also in its interactions with its clients, suppliers and the wider community. This tends to focus on issues such as diversity, inclusivity, equity, health, well-being, pay and modern slavery, although this list is not exhaustive. It’s probably the aspect which most obviously aligns with employment law.

Fostering a workplace culture which prioritises the social aspects makes good business sense: companies with a strong set of values which permeate the whole organisation often benefit from strong retention (and recruitment) rates, increased profitability and productivity, and a better reputation. However, fostering a good workplace culture is not a quick fix and it certainly isn’t static: it requires thoughtful and meaningful engagement and is fluid, requiring the constant adaptations which come with a drive to continually improve.

According to a paper published by Culture Shift, 69% of candidates wouldn’t take a job with a company that had a bad reputation, even if they were unemployed. Research by Deloitte into Gen Z and Millennials suggests that employees who are satisfied with their employer’s approach to diversity and inclusivity are more likely to want to stay with them longer-term.

Particularly as a result of recent global movements highlighting issues such as racial and gender inequality, the way an employer treats its staff, and the wider community, is under increased scrutiny. There have been many recent examples of serious allegations levied against high street brands, from modern slavery allegations (Boohoo) to sexual misconduct/harassment (CBI, McDonalds) and poor working conditions (Amazon), all of which come with unwanted negative publicity and can have a substantial impact on a company’s reputation. Not to mention the hugely negative press that P&O Ferries attracted when it sacked around 800 employees via video recording without prior consultation. With the prominence of social media, it’s now much easier for companies to be monitored and for activists or critics to launch campaigns which can have international reach and result in significant reputational risk.

This is already quite a heavily regulated area. For example, the Equality Act 2010 provides protection from discrimination, harassment and victimisation for individuals with protected characteristics. There’s wide ranging legislation to support minimum working conditions (e.g. minimum pay, holiday, rest breaks etc.). Gender pay gap reporting is now mandatory for private employees with 250 or more staff, and public companies with 250 or more staff must report on the ratio between their CEO’s pay and the average pay of their staff.

Although there are relevant pieces of legislation which offer protection, the social aspect of ESG is wider and more ambitious than that. There are too many matters to dive into each in detail, but many of the key elements of the ‘social’ aspect will be intrinsically linked to the organisation’s workplace culture. For businesses looking to make progress in this area, the starting point is often identifying what values are important to the organisation and what culture they want to create. Once a business has distilled its core set of values, this needs to be communicated widely and embodied by all staff. It might be helpful for an organisation to set out its vision in writing, or create a diversity and inclusion strategy, to ensure accountability. Involving employees in creating that vision means employers can draw on their different experiences and perspectives and the staff involved can really buy in to the vision and help embed it.

Below we’ve identified some of the key topics to focus on when looking at the social aspect of the ESG agenda. Although written policies about these issues are a good starting point, they need to be backed up by actions. It is easy to think of this as an ‘HR’ issue: whilst HR will certainly play a key part in developing and implementing the firm’s strategy, organisations who truly want to see a cultural shift will need senior leaders to invest in the strategy and be accountable. It will be worth spending some time looking at the policies you have in place and updating them to ensure they reflect your brand values. Consider addressing issues such as:

  • Equity, diversity and inclusivity – having strong EDI policies is a key ingredient to a positive work culture. However, the policies need to be meaningful and not just pay lip service to issues. Embracing a diverse workforce means supporting employees of different races, ethnicities, religions, abilities, genders, and sexual orientations – this provides a varied workforce which is often more adaptable and improves the quality of decision making by drawing on multiple perspectives and differing experiences. According to research by McKinsey, there’s a corelative relationship between diversity and business performance. A key part of a more inclusive workplace is to listen to employee views – perhaps consider creating a steering group to focus on these issues. A great deal of progress can be made by listening to your employees and incorporating their feedback. Not only will listening to employees help ensure that a range of opinions, backgrounds and experiences are accounted for in your policies, but it will also likely increase engagement, influencing retention, which is a key metric when rating ESG.
  • Anti-bullying and harassment – employers should make clear that they have a zero-tolerance approach to discrimination, bullying and harassment. It is no good having a fantastic EDI initiative and then failing to tackle microaggression, bias and discrimination if it happens. Employees should know that any failure to adhere to the company’s standards will be taken seriously, and result in disciplinary action if appropriate.
  • Recruitment – ensuring recruitment practices provide equal opportunities for all can encourage more robust decision-making processes and reduce legal risk. Taking action such as checking selection criteria and job descriptions from a discrimination angle, looking to eradicate bias (for example by removing identifying features of a candidate’s CV or having at least two people on an interview panel), and taking lawful ‘positive action’, perhaps to address underrepresentation of certain groups within the company, should help make recruitment more equitable. On which note, the government has recently produced guidance for employers on taking positive action in the workplace, to help individuals overcome certain barriers and improve representation in the workforce.
  • Health/well-being – now more than ever, mental health is on the agenda. Many organisations have introduced initiatives to support workers with anxiety, stress and burnout. A genuine commitment to support mental health and well-being through employee engagement and support can lead to increased productivity, higher retention rates and reduced sick days. Ensuring there are safe spaces for staff to air concerns and be supported will be important. Further, providing training to all employees on mental health and well-being, particularly line managers, should help reduce stigma and create a more open working environment. However, it’s not just about mental health: many employers are also looking at introducing other well-being initiatives, such as support for women experiencing the menopause and providing longer paid periods of bereavement leave.
  • Flexibility/hybrid working – having an approach to working which offers flexibility and tailored solutions to individuals – far beyond the usual formal ‘flexible working request’ approach – can be empowering to staff and help improve well-being. By way of example, the four-day working week trial in the UK was such a success that over 90% of businesses involved in the trial plan to continue with a short working week. Overall, business performance and productivity were maintained and stress and burnout for employees declined. Further, Deloitte’s Gen Z and Millennials research suggests that around 75% of this demographic prefer a hybrid or remote working pattern, so working flexibly needs to be embraced to attract and retain talent.
  • Benefits – offering employee benefits which align with the company’s values is something worth exploring and may include the use of social impact pension providers or offering ‘volunteering days’. Given the cost-of-living crisis, financial security is a key concern for many employees and so offering financial education and resources is a valuable benefit. Also, there appears to be an increased interest in self-development and learning opportunities for Gen Z and Millennial employees. As such, affording employees opportunities to partake in training, courses and qualifications, can have a positive impact on retention and employee well-being.
  • Representation – it may be harder for underrepresented groups in the workplace to have their voices heard. Ensuring those groups are represented, particularly at senior level, can help promote diversity and inclusivity. Better representation of women and minority ethnic people on boards is a key focus area. Much progress has been made in relation to female representation on boards, where in 2022 around 40% of UK FTSE 100 directors were women, however there is still a long way to go given that very few hold senior executive roles.
  • Pay practices – transparency is key here. Gender pay gap reporting is now mandatory for private employers with 250 or more staff. The government has also recently published guidance to help employers wishing to report on their ethnic pay gap (note that it is not yet mandatory to do so). Tackling the gender and ethnicity pay gap is complex, but organisations should have a strategy and targets in place to reduce the gap. That being said, having transparent and fair pay practices goes beyond the possible discrimination angles and looks at generally how an organisation rewards its employees. Public companies with 250 or more staff must report on the ratio between their CEO’s pay and the average pay of their staff. Executive pay is an area which is becoming increasingly scrutinised: shareholder revolts against UK remuneration reports increased significantly in 2021, up 56% on 2020. There is also pressure on employers to adopt fair pay practices for their lower paid staff, particularly during the cost-of-living crisis. Whilst employers are only legally required to pay national minimum wage depending on the age of their employees, over 12,000 UK employers voluntarily pay the ‘real living wage’ (the only UK wage rate based on the cost of living). Where businesses have fared well and profits have risen – resulting in bigger pay for senior executives and shareholders, as we saw with some large companies during the COVID-19 pandemic – there is increasingly an expectation that lower paid staff should also share in the rewards and receive a pay increase. On a slightly separate yet related note, more than half of FTSE 100 companies now include ESG measures as part of their executive incentive plans. Linking DEI and other ‘social’ objectives to executive pay can ensure senior leaders are aligned with the company’s ESG challenges and initiatives and drive the company in the right direction.
  • Third party partners – many companies work with charity partners or community projects to ‘give back’ to the local community. Establishing a relationship with an organisation sharing your company’s values demonstrates a commitment to those values and also a drive to have a wider positive impact on more than just your own organisation. However, a company’s interaction with others – such as those in their supply chain, their network, their customers etc. – is now also subject to scrutiny. Linked to this, if an employer is using agency workers or contractors, it will want to be sure that those individuals are being treated properly and fairly with regards to their employment status, pay rates, holiday and sick pay, pension contributions etc. Employers would be well advised to undertake an audit of their labour supply chain to ensure they are comfortable that the terms of any agreement are sustainable and legally compliant. In a more general sense, it may also be worth businesses critically appraising their relationships with other organisations to ensure they are confident that their values and practices align.

There is no doubt that a company’s HR department will play a pivotal role in helping shape and implement a company’s ESG agenda, particularly the ‘social’ part, however, investment is needed at executive level to set the agenda and ensure accountability. Linked to this, behaviours need to be demonstrated from the top and senior leaders must embrace the company’s vision in order to effect meaningful change.