The "S" of ESG has historically been neglected in favour of a focus on climate change and corporate governance. When people hear the word "Sustainability" their first thought is usually the environment. This is unsurprising, climate change and the environment have very much been part of the zeitgeist since the 1990s. But in recent years, the "Social" aspects of ESG have been getting more focus.
When the US Business Roundtable announced the end of shareholder primacy in 2019, it was notable that it said companies should focus not only on the environment, but also their workers. Matching this, the 2018 UK Corporate Governance Code focuses on people issues like never before, with employee engagement and diversity both key issues, backed up by regulations which require businesses to report on employee engagement and how they take employees (amongst other factors) into account when making key business decisions.
This focus on people issues started in earnest with the #MeToo movement and the increase in Gender Pay Gap reporting, following which Diversity and Inclusion went from "nice-to-haves" to "must-haves" for many businesses. We have done more D&I and Workplace Sensitivity training for clients in the last couple of years than ever before. In 2018 and into 2019, there became a real focus on culture (both for companies themselves and those invest in them) and businesses are increasingly moving from whistleblowing procedures (which have negative connotations for many) to how you engender a "Speak Up" culture. Our warranties for M&A transactions now pick up, not only legal claims, but also issues which could suggest there are cultural issues within a business which might lead of problems down the line for any purchaser.
More recently, the coronavirus pandemic has really highlighted the importance of Social issues when it comes to Sustainability. Taking care of the workforce can be less tangible and harder to quantify than percentage figures for board composition or eye-catching green initiatives. However, it is important not only reputationally, but for the long-term health of any business, especially at a time when employees are particularly vulnerable. During lockdown, it was inevitable that businesses would have to make quick, survivalist decisions, but it will be interesting to see how these actions are viewed in the aftermath of the pandemic. Some employers have already been criticised for "abandoning" their staff during the crisis or forcing them to work when it was not safe to do so. This issue will continue as people start to return to work, potentially in working environments they feel are unsafe. At the same time, employers not in sufficient financial difficulty have faced criticism for drawing on Government funds (e.g. Premiership football clubs furloughing employees in the UK and restaurant chains claiming Government support in the US).
Focus on the social aspect of ESG may turn out to be a positive side-effect of the response to coronavirus, relevant not only when we are figuring out how to work safely whilst re-starting the economy, but for the long-term expectations on businesses to protect and support those that work for them.
For more on these issues, and further advice and guidance on how businesses can "Build Back Better" by focusing on moving towards a more sustainable business model at the same time as meeting increasingly stringent legal and regulatory obligations designed to promote the stakeholder capitalism agenda, please visit our Sustainable Business hub.
