We know that Environmental, Social and Governance (ESG) ratings have important implications and can impact investor appetite, the cost of capital for businesses and the ability to recruit. ESG is now attracting increased attention by Boards and senior executives, and demands everyone’s attention.

The ‘S’ of ESG can sometimes seem to have been neglected. Perhaps this is due to ‘social’ factors being the hardest to pin down and define, or to know what steps to take to improve a business’ credentials in this area. There is not always full agreement as to the scope of ‘S’. We would see it as at least touching on human rights, diversity and inclusion, labour issues and how a company treats its workforce, and how it interacts with other third parties such as suppliers, clients and communities.

In the past it’s fair to say there have been many standards rolled out on a “soft” law basis – well-respected, highly influential but ultimately voluntary. For example, the UN Guiding Principles on Human Rights, the OECD Guidelines for Multinationals and the Workforce Disclosure Initiative which aims to improve corporate transparency and accountability on workforce issues, and provide companies and investors with data on workforce equality and standards. In 2020, over 140 global companies took part in the latter.

The interest in the ‘S’ of ESG is gaining traction in terms of ratings – we have seen the Global Reporting Initiative lead the way in calling for mandatory sustainability reporting, and even in the absence of universally adopted global reporting criteria, there has been an increasing focus on disclosure and evaluation of reports. Equally, a number of national and regional legislative measures are now in the pipeline or already in force.

There is increasingly an emerging dynamic legislative agenda in this space, impacting both old and new employment related issues, with a clear future direction of travel which can’t be ignored. And this is reinforced by so many wanting to “build back better” post the COVID-19 pandemic.

With ‘social’ representing such a potentially broad range of subjects, we have picked out three which in our view are a minimum on the “to do” list for anyone wanting to ensure they meet expected standards and to take their organisation forward.

Human rights and supply chain integrity

First on the list is human rights and supply chain integrity. There is a key theme of governments using transparency and disclosure to try to ensure no human rights abuses in the supply chain, throughout the various tiers leading to the reporting company. The stage was set in this area with legislation reaching the statute books in several countries to address the potential presence of forced or child labour in a company’s supply chain – for example the Modern Slavery Act in both the UK and Australia, and the incoming law in The Netherlands.

Another model governments are taking is the requirement for mandatory due diligence, as heralded with a broader canvass by the Vigilance law for French headquartered companies.

And now witness some of the next:

  • In March 2021 the German Cabinet and subsequently the Bundestag passed a new Act on Corporate Due Diligence in Supply Chains. Once in force, the Act will require companies to take steps to analyse risks to human rights in their supply chain, and take preventative and remedial measures where appropriate. They will also be required to set up grievance mechanisms and report on their activities – continuing the theme of transparency we are seeing across the developed world.
  • In the same month, the European Parliament voted in favour of adopting legislation which will require companies to assess whether their operations and business relationships can in any way be linked to a potential adverse human rights impacts, and to publish a statement to this effect. The ball is now in the EU Commission’s court to decide where to take this next in their sustainability agenda.
  • In June 2021, the Norwegian Parliament passed the Transparency Act, with the purpose of promoting companies’ respect for fundamental human rights and decent working conditions in connection with the production of goods and services.
  • In August 2021, the Australian Senate passed a bill which, if it becomes law would prohibit the imports produced through the use of forced labour, irrespective of origin.
  • And as recently as September 2021, the President of the EU Commission has called for a EU wide legislative ban on the import of products linked to forced labour. Although the details are still to come, the announcement indicates a clear intention to legislate in this area.

There is a clear momentum developing, and the potential stakes for companies are high. Markets, consumers and job applicants will soon identify those who are getting it right and those who aren’t.

Now is the time for companies to take action: to understand any reporting obligations that might apply to its business; to consider the extent of its due diligence to date and whether it has mapped salient risks; how to manage and mitigate those risks once they are identified; and to think about what is coming down the tracks next so that the business can be in the best possible position as we move into a world of greater transparency and higher expectations by customers and citizens.

Diversity and Inclusion

Many companies have taken strides to improve their Diversity and Inclusion (D&I) offering, prompted by the changes to the landscape wrought by the #MeToo and Black Lives Matter movements.

This trend is set to continue: Canada, Spain, Israel and Ireland are among countries to have recently legislated on gender pay equity and reporting requirements and the EU has proposed a Directive on pay transparency which would introduce mandatory gender pay gap reporting for companies that employ at least 250 people in the European Union. The UK already has equivalent national legislation in place, and the UK government is now consulting on additional mandatory pay gap reporting – this time with a focus on ethnic disparities, not just gender.

We have also seen regulators and institutions take an increasing interest. In the US, the SEC has recently approved Nasdaq’s board diversity listing standards under which rules on diverse board representation and diversity disclosure are to be phased in for Nasdaq-listed companies. Meanwhile, the UK’s Financial Conduct Authority has opened a consultation into a proposal to increase diversity on listed company boards. This new focus comes with complexities and nuances which need to be thought through – not least around categorising different ethnicities within the workforce and then the challenges that arise from those findings. Businesses need to understand properly what positive action they might take in this regard, and any constraints they might face.

Companies would also do well to think about mobility in their workforce. Gender pay gap reporting has not only revealed significant disparities in rewards and treatment as between genders, but also as between relevant sections of the workforce, with potential issues of segregation and immobility.

Whatever the future legislative agenda holds, it is clear that the growing mood is for to companies to reflect the diverse make-up of the societies in which they operate.

Employee and Stakeholder Engagement

Arguably employee and stakeholder engagement is a twofold virtue: both in itself and as a means of measuring progress. It will likely feed into improved ESG scores; and ESG performance will itself become increasingly relevant in demonstrating to the workforce adherence to a company’s values, as well as ensuring employee satisfaction and potentially competitive advantage in the war for talent.

Looking internationally, we can see a clear divergence in historic approaches towards employee engagement in different jurisdictions: some governments press good practice, others have introduced mandatory legal measures on inflection points such as M&A, redundancy and business transfer events. Others go further, with the well-known example of Germany having a long tradition of recognising Works Councils and adopting codetermination as a method of engagement.

Companies would do well to give serious thought as to how to navigate this patchwork of laws, regulations and recommendations. Is it appropriate to treat employees in each country differently in line with national laws (with the risk of being accused of national ‘arbitrage’, as employees in lighter-touch jurisdictions bear the brunt of redundancies and reorganisations), or should companies apply a one-size-fits-all approach to their global workforce?

Businesses also need to have an understanding of wider stakeholders impacted by their business and their activities and their relationships. Alongside employee communication there needs to be a broader dialog with affected stakeholders. It will be important to develop a strategy for employee engagement, and in parallel stakeholder engagement, and consider what actions can be taken now, to audit the current approach, understand the current issues and opportunities, and periodically revisit and refresh to ensure the business remain on track.

So what next?

No business is an island, immune from these changes. Understanding the S of ESG will become increasingly critical in the employment field, as will navigating “hard” and “soft” law, relevant reporting standards and differing national initiatives across the globe. For some this will not be a comfortable ride – but the price of failure will be high. For all businesses, this will be a continuing and iterative process.

With a legislative baseline now established, and many regulators and parliaments indicating their intention to continue the current direction of travel, now is the ideal time to take stock, ensure capacity to address these issues, and decide what steps are required in your organisation.