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Environmental, social, and governance (ESG) issues are undoubtedly top of mind for companies today and increasingly central to a firm’s reputation and financial performance and are scrutinized by an array of stakeholders including investors, ratings agencies and clients.
A recent whitepaper “ESG and its implications for human capital management” (attached) by Mercer in Hong Kong highlights the importance of HR in driving the ESG agenda. It is only when a company’s employees are aligned with purpose of the organization through culture, strategy, leadership and HR practices, that they can have a further impact on environmental and social sustainability through daily operations.
ESG Matters
But why should companies care? The whitepaper points out the growing demand for ESG accountability from multiple stakeholders.
Investors: An increasing number of studies are showing evidence that companies that perform strongly on relevant ESG issues generally outperform those with poor financial results. Even during the COVID-19 situation in Q1 2020, Mercer observed that ESG factors have a significant role to play in performance. With the growing significance of positive relationships between ESG and financial return, investors are more open to ESG-themed investment products and the total size of investment is expected to grow.
Regulators: According to the Sustainable Stock Exchanges (SSE), an initiative established by the United Nations, 54 out of 101 stock exchanges around the world have written guidance on ESG disclosure for listed companies in place.[1] However, reporting standards and regulations vary across countries, and most of the guidance is not mandatory. Hong Kong will have stricter ESG reporting requirement as of July 1, 2020, and it is expected that similar frameworks will be developed and introduced in other countries.
General Public: From our 2020 Global Talent Trends Study, one in three employees say they would prefer to work for an employer that shows responsibility towards all stakeholders, rather than solely to shareholders and investors. As Millennials and Generation Z enter the workforce and move up the ranks, social impact and values become increasingly important in all respects — joining a company, investing in a company, buying a brand, etc. Findings from the Global Risks Report of World Economic Forum show that more than 40% of Millennials have accepted one job offer over another because that company was seen as more environmentally sustainable, and Gen Zs are likely to share similar views.
Renee McGowan, Mercer CEO for Asia said, “A failure to address or manage ESG risks and issues can have a huge impact on organisations. It can negatively impact financial performance and share price. Companies may also face challenges in attracting future investors and engaging with not just their employees but also their customers. While employees want fairer and better workplace practices, customers are demanding that organisations demonstrate purpose beyond profit.”
The role of HR
The HR community can take the lead and shape the human capital of the company by incorporating ESG planning into the overall human capital framework. We believe the following areas could be a great starting point to better position human capital’s role so that it aligns with organizational ESG initiatives.
1. Demonstrate your organization’s purpose with the right culture
Define your employee value proposition (EVP) with purpose and long-term vision beyond financial success, and shape your organization culture around these themes. For example, the insurance sector has been promoting health and wellness as a culture, with the dual aim of improving individuals’ everyday life and having a positive impact on society.
2. Improve the design and governance of performance and executive rewards
Performance management and total rewards are critical in driving desired behavior and results. Non-financial metrics, especially those related to ESG, are increasingly influential in the company’s performance scorecard and the KPIs of senior executives’ incentive plans. According to Mercer’s 2020 Global Talent Trends Study, 68% of executives indicated that they want to focus more closely on ESG goals.
A reward governance framework has to be in place to define the process of formulating and approving reward-related decisions, as well as review and approval hierarchies. A strong governance process could improve fairness in remuneration-related decisions, and allows the management team to be accountable and transparent as much as possible.
3. Plan and engage your workforce with social issues in mind
Workforce planning and succession planning provide the best opportunity for companies to factor in relevant social issues in their workforce, like gender equality, diversity & inclusion, minimum wages, etc. Companies could also demonstrate their social responsibility via interactions with their workforce. Addressing the needs of different employee segments, and energizing their experience at work, is a crucial part of employee engagement, especially in a turbulent environment where employees may be very anxious about the future.
