What Is ESG and Why Should HR Care?
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Environmental, social, and governance (ESG) standards are a hot topic in Human Resources today. ESG is a matter of both public relations and employee engagement. More than 74% of employees believe factors such as organizations reducing their environmental impact, improving the communities where they operate, and adopting sustainable supply chain practices should be part of a company's mission, according to Deloitte.
Nneoma E. Njoku, Head of Labrador U.S., a global communications firm specializing in corporate disclosure documents, wants Human Resources professionals to better understand ESG strategy. Njoku is steadfast in her belief that HR will play an increasing role in corporate disclosures around ESG.
The creator of the U.S. Transparency Awards, Njoku says HR can also play a role in shaping the workforce's ideas. Most importantly, Njoku says organizations should be held accountable for ESG standards, and they should measure and share their progress with the public.
HREN: What is ESG and why is this relevant to Human Resources?
NEN: Environmental, Social, and Governance (ESG) is a term that helps stakeholders analyze and understand how an organization manages risks and opportunities mainly around environmental, human capital management, and ethical issues. Environmental (E) issues consider how a company assesses climate-related risks and opportunities, addresses issues of circularity, and safeguards biodiversity. Social (S) issues examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance (G) issues deal with a company’s leadership, compensation, internal controls, corporate ethics, and shareholder rights.
Social issues have taken on even greater importance over the last five years because of the global COVID-19 pandemic, the Black Lives Matter movement, the #MeToo movement, and, most recently, the “Great Resignation” of employees in 2021 and 2022. As a result, these issues, and many more, have driven an increased interest in social disclosures.
Companies are expected to disclose information on policies and practices they have in place. For example, HR teams manage the data on turnover rates, employee and management diversity, training and development programs, and pay equity to name a few. In addition, companies are increasingly assessed on societal issues, often around how they engage with the communities in which they operate and how they contribute to the well-being of those communities.
HREN: Why is ESG reporting so important now? What metrics are companies sharing? Do you agree with this approach? Why or why not?
NEN: ESG reporting, also referred to as sustainability or corporate social responsibility (CSR) reporting, has become a widespread practice among publicly traded companies around the world. ESG reports are a direct response to growing investor and other stakeholder demand for reliable, consistent, and comparable ESG information. However, because it is not yet regulated in the United States, the data and reporting methods vary greatly from one company to the next.
Companies are sharing a myriad of data, but most importantly, the readers are looking for specific ESG goals and metrics. For example, within the social section, the focus is on diversity, equity, and inclusion (DEI), which has expanded to include not only gender and racial/ethnic diversity, but also diversity in sexual orientation, age, (dis)ability, veteran status, and more. Stakeholders will be looking for signs of progress around gender and racial and ethnic diversity, from the board level down to suppliers, vendors, and contractors. Stakeholders are looking for data (quantitative and qualitative) to see if companies are backing up their aspirational commitments with real progress. This progress is measured by key performance indicators (KPIs) that tie back to stated targets.
Comparability of information across companies and industries has consistently been identified as one of the challenges and limitations to the use of ESG reports and data. Consequently, there is an increasing importance attributed to making use of a number of existing sustainability reporting “standards” which aim to provide standardized frameworks and metrics for ESG reporting.
For example, the environmental sections of ESG reports are increasingly structured around the targets prescribed by the Science-Based Targets initiative (SBTi) and in line with the disclosures recommended by the Task Force on Climate-Related Financial Disclosures (TCFD). Reporting standards such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) encompass methodology and frameworks that can be used to report across the full scope of ESG issues. The United Nations Social Development Goals (UN SDGs) provide yet another framework for placing the activities of a company within the context of areas identified as strategic for global progress across a number of ESG goals.
These reporting structures and frameworks provide a common language for speaking about ESG issues. Their growing adoption should lead to an improvement in the quality and comparability of data being reported and a more uniform way for stakeholders to analyze and assess the extra-financial performance of companies.
HREN: What are some of the highlights from the study of the S&P 500’s top 50 companies’ ESG reporting? What lessons can we learn from these findings?
NEN: In a study conducted by Labrador, experts of the S&P 500’s top 50 companies’ corporate disclosure, 48 published some sort of ESG report. All companies (except one) provided an interactive, clickable PDF, and most companies had additional information about their ESG initiatives online.
When it comes to readability, ESG reports have taken on design principles that we are accustomed to seeing in glossy annual reports. However, because most readers are online, 63% of the S&P 50 publish the reports in landscape format, incorporating photos and infographics, to increase reader engagement and understanding. On average, the page count is 87 pages and is divided into six chapters. The longest section is the social section, averaging 22 pages. Because readers are looking for information that is concise and digestible, the use of infographics is especially important in longer documents.
Eighty-eight percent of all company documents begin with a letter from the CEO and/or Chair of the Board. It serves as the company’s best means to communicate the role sustainability plays in strategy setting, risk management, and company culture. It also provides an opportunity to present management’s philosophies and principles in a more thoughtful manner.
Nearly all the benchmarked S&P 50 companies discuss how they manage climate-related risks and carbon reduction. More than 90% disclosed at least one climate/carbon reduction goal, with the vast majority of those also showing their progress on goals. Eighty-five percent of benchmarked companies disclosed Scope 1 and Scope 2 GHG reduction goals, and a little more than 60% disclosed a Scope 3 GHG reduction goal.
All companies referenced an external framework with the average number reported being three. The review found that:
- 85% report to Sustainability Accounting Standards Board - SASB
- 74% report to Global Reporting Initiative Standards - GRI
- 68% report to the Task Force on Climate-Related Financial Disclosures- TCFD
- 66% report to the United Nations Global Compact Sustainable Development Goals -UN GC/ SDGs
The documents are long and can be complex. The trends of reporting are hard to follow because of the lack of regulation. But in all cases, providing clear and concise information using graphics and summaries, where possible, will aid the reader in understanding the information more quickly and accurately. A successful summary highlights the company’s progress toward goals and material topics in a visually engaging and useful manner. This section can live in isolation for engagement purposes.
HREN: What advice do you have for HR leaders when it comes to both ESG and reporting on it?
NEN: Readers of ESG reports are becoming more sophisticated; instead of merely looking for ESG commitments, they are starting to scrutinize the details of how and when these commitments will be met. More stakeholders are looking for year-over-year progress, which often requires companies to set goals, track KPIs and metrics, and disclose quantitative or qualitative data.
Continuously question if you are providing your stakeholders with the information they expect. Set targets that are realistic and report on the progress year-over-year. If you are not already doing so, consider adopting target-setting and standard reporting frameworks, such as the SBTi, TCFD, GRI and SASB, in addition to the UN Social Development Goals.
REPORT: State of HR
HREN: Is there anything else you'd like to share with our audience? If so, what?
NEN: This year, we expect HR will play an important and larger role in corporate reporting, especially with ESG. Though HR professionals don’t typically ‘own’ corporate disclosure documents, they provide the necessary materials for the reports. HR professionals can be strategic about what metrics and information they provide to other departments.
Don’t be afraid to tell your company’s real story. Many companies don’t share the extra details and metrics because they don’t feel it is enough, but they are missing an opportunity to share their mission, values, important initiatives and accomplishments with key stakeholders.
Is ESG a priority at your organization? Why or why not? Let us know in the comments.
Photo by Lisa Fotios for Pexels
