Full disclosure: I’m kicking off my first blog post (as the founder of emHrge™) by blatantly and almost word for word stealing from Harvard – or more specifically, the Harvard Law School Forum on Corporate Governance. But as you read on, I think you, and they, will forgive my minor transgression.
My tale of thievery begins with the publication of an article by the law school forum titled, “What’s ESG Got Do With It?” So you see, I only stole a little bit… and as will be my style in future blogs, my actions are only in the interests of furthering a dialogue between me and what I hope will be a multitude of readers.
So, Let’s Begin
The Forum on Corporate Governance article featured an analysis done by Teneo, a CEO advisory firm, of 200 sustainability reports published by S&P 500 companies during the first half of this year. It’s an enlightening and entertaining read, with 10 valuable strategic considerations meaningfully and creatively summarized. I give a tip of the hat to the authors for taking what could be very dense material and making it easily accessible for both experts and newcomers to the area of ESG (Environmental, Social and Governance).
Here are a few of Teneo’s broad findings worth noting:
The “battle” between supporters of ESG and the anti-ESG faction appears to be largely one-sided. To quote from the article:
Large investors have expressed a strong belief that certain ESG factors can have a material impact on a company’s long-term financial health, and there are no signs that investors are backing away from that stance. In fact, as discussed in our annual proxy season review, “anti-ESG” shareholder proposals fared poorly again in 2022, averaging less than 3% support, with many failing to meet the 5% threshold for resubmission. Investors are likely to continue demanding that companies proactively manage their material ESG risks and opportunities appropriately. However, as companies continue to act on ESG, questions remain over what companies should disclose and how.
Similarly – though not nearly as lopsidedly – ESG (33%) and Sustainability (31%) are the preferred terms in the lexicon of responsible business and investing, overshadowing Corporate Responsibility (13.5%) and Corporate Social Responsibility (7%).
But, hey, combined, the later account for 20.5% of report title appearances. The perception that CR/CSR is synonymous with corporate philanthropy may be what’s behind their limited usage. I won’t further delve into this now as I think the nomenclature here is worthy of a separate blog post. Overwhelmingly, sustainability reports are put forth under the CEO’s signature, appearing alone 79% of the time; add to that the 10% of reports signed by both the CEO and the Board and there’s no doubt that such reporting isn’t a side hustle for the organization.
Rounding out my broad overview is this headscratcher from the report, quoted in the italicized text below (the parenthetical is my addition):
(Only) Half of 2022 Sustainability Reports indicated that a formal materiality assessment was conducted to help determine ESG priorities.
Say what? Either some or all of the 50% who didn’t reference doing a materiality assessment in fact didn’t conduct one; otherwise, they didn’t think including the results of that assessment was worth the paragraph or two (or space for a visual) required.
If it’s the former, one can be left to ponder how an organization can know what to focus on if it doesn’t know where it stands across a myriad of sustainability factors? If it’s the later, they’re doing a disservice to those reading their report.
What’s HR Got to Do With This?
(Yes, now I’m riffing on Tina Turner.)
In the world of ESG, the “E” component often takes center stage. Add to it the use of the terms “Sustainability” and “ESG investing,” well, it’s no wonder many believe ESG = environmental risk mitigation and stewardship. For the record, I indeed support businesses' increasing focus on their environmental footprints: I believe society, including businesses, must do more to sustain a planet fit for human habitation; the latest environmental news coming out ahead of COP27 makes that clearer than ever.
However, when it comes to sustaining humanity at large, and a productive workforce within an organization, other issues need tending to. And while the analysis conducted by Teneo highlights much progress, reading between the lines it’s apparent that human resources may be taking a back seat to concerns over environmental resources. Yet viewed another way, it also means there are great opportunities ahead for further advancing the social/societal component of ESG.
Here’s some areas I believe to be materially important to an organization’s approach to managing the potential and, yes, the risks inherent in the human element of their business:
Diversity data needs to be disclosed wherever appropriate. Proxy statements. Annual reports. sustainability reports. DE&I reports. Not just one place, or two, but wherever the information can be considered relevant to the audience. And it needs to be broad-based.
Teneo’s analysis of the reports studied, meanwhile, found a slight decline (4%, to 47%) in the number of sustainability reports that included diversity targets. Study authors posited that this doesn’t mean fewer companies have set diversity targets or are measuring them; rather, that the data may have moved to separate DEI reports.
While shining a spotlight on DEI by publishing a separate report is commendable, not including the data in sustainability reports reinforces the notion that sustainability practices prioritize the “E” in “ESG”. Because not everyone reads everything, reporting, at least on some level, all elements of an employers ESG (or CSR) strategies in both its overall sustainability report and any other related reports is vital.
The concept of pay equity needs an expansion. Spurred on by various financial reporting requirements both in and outside the U.S., as well as (in some places) state and country laws, companies are analyzing their pay practices through an equity lens and reporting out their findings. But how meaningful are these analyses and the remediation steps that arise as a result?
When examining pay equity, is the organization considering these two important factors:
All elements of remuneration? In many businesses, and for many positions, base pay is not the only component or even the largest component. Among the reports analyzed, 32% shared “adjusted pay gaps,” which the authors described as “measuring the difference in median total compensation between demographic groups by adjusting for factors such as role, seniority, education, experience, and location.”
The impact of hiring and promotion practices, and career development programs, on longer term pay equity?
The authors found that 35% of the reports studied included new hire data by gender (35%) and race/ethnicity (26%), but fewer reported promotion and turnover rates.
Is anyone considering that the focus on pay equity, while commendable, leaves out roughly one-third of an employer’s spend on its employees… benefits? (This is a rough number, based on data from the U.S. Bureau of Labor Statistics. It of course varies from employer to employer, industry to industry, country by country; but you get the idea, it’s quite substantive.)
We all know that in order to support a sustainable (and productive) workforce, employers need to make a significant investment in employees’ total wellbeing: their physical, emotional, financial, and social “health.” Yet where’s the data on how equitable that spend is, whether the programs are equally accessible, and how effectively these programs are being delivered... across all dimensions of diversity?
Some ESG-minded organizations establish their areas of focus by conducting a materiality assessment (see “headscratcher” point above). And some HR departments regularly conduct total rewards benchmarking studies. Wouldn’t it be great though if rather than “employee wellbeing” (or some other term) being a single consideration in an organization-wide materiality assessment (with a few other people-related elements tossed in), HR conducted its own deep-dive materiality assessment? Such an assessment would include all plans, programs, and policies. Going further, just as companies assess both the safety and environmental practices of its major suppliers, shouldn’t HR play a role in assessing the adequacy and fairness of the supplier’s HR and total rewards practices and programs?
While Teneo’s study examined U.S. Sustainability Reports, this isn’t a U.S.-only topic. In some cases, regulations and reporting requirements are more stringent outside the U.S. As a result, U.S.-based employers and their HR function may in practice defer to local countries to report on and/or address these issues. However, if an organization is committed to creating a sustainable and productive workforce, ensuring equity, accessibility, and inclusivity in the process, it must – as the saying goes – think globally and act both globally and locally. Again, a (global) Materiality Assessment focused on HR practices is a good place to start.
To wrap things up and close out the inaugural emHrge(ing) Perspectives post, I’d thank to thank both Teneo (a firm that I have no connection to) and the Harvard Law School Forum on Corporate Governance for their illuminating examination of Sustainability reporting, and you, my new reader, for your time.
Let’s start a dialogue. Please share your comments and ideas regarding this post, ideas for future blog posts, and any other thoughts you may have either in the comments section or by leaving a note on our Contact Us page.