There has been much talk about ESG - Environmental, Social and Governance. What started as a metric for investors to make ethical investment decisions has now grown to encompass how companies should, and are expected to, behave in general. ESG is now a key issue for company boards and management, and an important consideration for shareholders and investors, individual employees and stakeholders alike. There are rapidly evolving ESG regulations and disclosure requirements with which Hong Kong companies need to comply.
What is ESG?
Traditionally, most companies conduct their business by looking for the highest profit line with the lowest costs. But increasingly, the focus has shifted to ESG issues for which there is growing evidence that actions and decisions that are ESG related drive long-term sustainable value in a business. ESG has now moved beyond just an investment framework. With increased public awareness, society now expects companies to be mindful of their choices and impact on others while conducting their businesses.
So, what is ESG? To put it simply:
- The "E" of ESG stands for "Environmental", and concerns the impact of a company's choices on the environment (e.g., energy consumption, use of finite resources, or creation and disposal of waste).
- The "S" of ESG stands for "Social", which encompasses how the actions of a company may affect the social well-being of its employees, the wider community in which it operates, and society at large. This strand has been particularly important during the COVID-19 pandemic.
- The "G" of ESG stands for "Governance", which concerns how the company is run, from the decisions made within a company (and whether they are made fairly, honestly and ethically), to how its board and other leadership teams are composed (e.g., diversity considerations).
Why is ESG Important to HR?
Having a good ESG profile will make a company more attractive to investors. But there is more. In the same way that investors wish to invest conscientiously, employees also wish to work for companies with a strong set of ESG values and priorities, particularly if these values align with their own.
Employees are able to and will gauge what companies are doing to pursue their ESG values. Whether companies are doing enough will have an impact on how engaged employees are to the company through alignment of corporate and personal values. Human Resources (HR) must be alive to these issues to help attract and retain the company's talent.
Ultimately, HR professionals should bear in mind that ESG is a reflection of the values of society. Where a business's workforce aligns with society's standard, a greater understanding of the market and customers will naturally be achieved. Within this alignment ESG brings benefits to a company, including greater profits and enhanced attractiveness to investors and employees.
What Should HR Do?
Given the nature of the issues being addressed in ESG, by its very definition, an employer cannot be reactive. Addressing ESG in HR requires a proactive mindset and approach.
Importantly, adopting ESG principles typically means business behaviour that is above that of the minimum standard imposed by the law.
So, what does that look like in practice? These are the areas where HR can make a start.
- Talent planning - ESG is a rapidly developing area - does the company have the right people with the right skills to advise on and support its ESG initiatives? It may be necessary to hire staff with a different skill set, as well as clearly define ESG-related roles and responsibilities. Does the company have a diverse workforce, and in particular, diverse representation on boards and in management? Does it have appropriate succession planning to ensure diverse representation on boards and in management?1
- HR data and systems. Without appropriate data a company will not be able to set measurable goals and track and report progress. Diversity and Inclusion (D&I) goals, such as "we will aim to do better this year", without measurable targets do not provide comfort of commitment to promoting diversity and inclusion as well as accountability. Does the company have the required D&I data to make informed decisions, set measurable goals and be accountable?
- HR supply chain. HR's sphere of influence can be beyond just managing a company's employees. They may cover third-party providers such as recruitment agents, labour hire companies, independent contractors, benefits providers, insurers and human resources information system providers. A company's choice of and terms on which it engages third-party providers will play an important part in its ESG strategy. Do the company's third-party service providers support its ESG values? For example, do your third-party recruitment agents know about the company's diversity requirements and have appropriate systems and processes to source and screen diverse candidates? Do they comply with ethical and anti-bribery standards?
- The "carrot" and "stick" to motivating employees to take action on ESG. How does the company include ESG goals in individual performance goals and compensation arrangements? Are there appropriate malus and clawback provisions in senior executive compensation arrangements? How does the company recognise and support employee contribution in giving back to society (e.g., volunteer work)?
- Have - and implement - appropriate policies to support ESG. HR can engage in ESG through implementing appropriate company policies and practices. Policies reflecting/addressing core ESG values such as diversity and inclusion, flexible work, promotion and remuneration (including those dealing with gender/ethnicity, pay/representation gaps), whistleblowing, well-being, and effective disciplinary and grievance procedures can greatly assist in areas such as promoting diversity and inclusion, and preventing harassment, discrimination, bullying and inequality. Just having appropriate policies in place is insufficient. The policies must be implemented. There must be sufficient education and training to give effect to the policies, including refresher training if necessary. Sometimes things do go wrong and where there is harassment or discrimination the company should have processes in place to detect when these occur and take swift and appropriate action.
- Comply with the law (of course). This is a minimum. In the employment law space there are a number of laws with which a company with human capital must comply. They include the Employment Ordinance, minimum wage laws, Occupational Health and Safety Ordinance, anti-discrimination and harassment laws, and Personal Data (Privacy) Ordinance. Regular self-checks or audits for compliance not only reduce the risk of a complaint or claim, but demonstrate a commitment to employees and others working for the company that they do not have to complain before the company will react.
- Stay updated on ESG. The fact that ESG guidelines and standards are evolving rapidly makes it all the more important to be deliberate in staying updated on developments. For example, the Hong Kong Stock Exchange recently amended its Corporate Governance Code and Listing Rules for listed companies, addressing issues such as diversity on boards and whistleblowing policies and systems2. The SFC3, HKMA4, MPFA5 are at different stages of implementing ESG-related regulation. For updates you can subscribe to our ESG blog here.
The list above is not exhaustive, but it is a start. Companies should start today because changes associated with ESG will not happen overnight.