ESG and HR: What You Need To Know and Where To Start
Sustainability has been top of mind for business over the last decade. Many organizations have committed to a net-zero future with promises regarding changing supply chains, eradicating fossil fuels, and adopting environmentally friendly business practices. Beyond oversight and investor responsibility, HR teams can contribute and enable ESG practices in a way that benefits individuals, organizations, and communities.
In this article, we explore how environmental, social, and governance (ESG) requirements are changing the role of HR and highlight the opportunities on the horizon for HR leaders and professionals as part of the ESG agenda.
Contents
Understanding ESG
How HR contributes to the ESG agenda
Integrating ESG into the HR strategy
How HR can start driving ESG within their organization
Understanding ESG
The ESG acronym stands for three domains of responsibility organizations need to consider in terms of how they conduct their business: environmental, social, and governance.
Environmental
Environmental refers to the impact organizations have on the environment. For example, their carbon footprint, utilization of resources, and adoption of pro-environmental practices.
Case example
BMW Group is using renewable energy at their plants.
- Wind turbines support production at the Leipzig plant in Germany, and hydrogen fuels approximately 130 floor conveyors. The facility is also piloting a newly developed hydrogen-powered burner technology in its paint shop.
- The San Luis Potosi site in Mexico fully powers its operations with CO2-free electricity, thanks to solar panels.
- The Munich site harnesses hydroelectric power from the Lech and Isar rivers to generate electricity for its production needs.
Social
Social refers to how the organization manages its relationship with other parties, including its employees, customers, suppliers, and communities. For example, responsible labor practices, focus on inclusive work, and upholding human rights and safety all relate to the social pillar.
Case example
Nestle, Mars, and Hershey all source cocoa from West Africa, where cases of child labor and forced labor have been an unresolved challenge. Public scrutiny has demanded some of these brands take a more active view on dealing with responsible suppliers and ensuring fair and decent practices.
In contrast, Tony Chocolonely is a brand committed to fair practices and paying fair prices to ensure decent work practices from their suppliers. By their own admission, they are not 100% slave-free but actively campaign and eradicate unfair labor practices from their supply chain.
Governance
Governance refers to how the company is managed. For example, factors such as board diversity, executive compensation, transparency of policy and practice, and ethics are all related to the governance pillar.
Case example
Many companies took to social media to celebrate their commitment to female representation in leadership on International Women’s Day 2023. Meanwhile, Francesca Lawsome and Ali Fensome built a gender pay gap chatbot that automatically extracted publicly accessible data from these companies to assess their commitment to gender equality in the workplace.
This initiative showed many inconsistencies between what companies say and what they do:
- Heathrow Airport posted stories from “Women at Heathrow”. However, women’s median hourly pay is 14% lower than men’s.
- Male employees at the domestic violence charity Refuge were paid 23.9% more than their female counterparts.
- On International Women’s Day, Scottish Widows promoted its services aimed at closing the pension gap. It turned out that they pay female employees 14% less than their male workers.
ESG is about managing risks and making conscious decisions on how the organization engages with the world, acts responsibly as part of the community, and upholds excellent ethical practices. It involves holding organizations to predefined standards and good practice frameworks.
In many organizations, ESG is the sole responsibility of Investor Relations or Sustainability Committees, yet this approach does not deliver tangible results. Traditionally, ESG has been understood from investors’ perspective, highlighting their desire to allocate resources to companies that act responsibly and sustainably. Professor Adolf Berle is considered the father of ESG, and his work in the 1930s set the tone for modern-day practices related to the social responsibility of for-profit corporations.
ESG has to be ingrained across the organization as a way of work that permeates across departments in the culture of the business. Even though some aspects will find a natural home given the areas of accountability and responsibility, ESG cannot be something organizations “do” but needs to become part of what they are.
We discussed ESG and HR with ESG advisor Sakshi Bansal. Watch the full interview below:
How HR contributes to the ESG agenda
Shifting our lens to HR, various matters related to ESG fall within the responsibility of Human Resources. Unfortunately, many HR professionals don’t make the connection, and ESG remains a concept that does not reside within the scope of their function.
Contrary to this belief, HR is already actively involved in ESG in many ways. Here is an overview:
Environmental
Social
Governance
How HR contributes
Practices related to managing the carbon footprint and climate sustainability of the business
Practices associated with managing the workforce community and upholding human rights
Practices related to transparency, trust, and ethical conduct
Example practices
It’s clear that ESG activities are closely linked to the HR strategy. Currently, in many organizations, HR does not actively incorporate ESG activities into the people strategy, often only being involved at an operational level. They are not present in strategic conversations regarding how ESG can be incorporated into organizational culture, practice, and values.
For HR to become more active within the ESG domain, a shift in strategy is required.
Integrating ESG into the HR strategy
There are two different approaches to integrating ESG into the HR agenda. Both have benefits and limitations; depending on the business context, organizations need to make a decision about which will be more appropriate.
Approach 1: ESG as an independent pillar and area in the HR strategy
In this approach, ESG becomes a dedicated strategic pillar of the HR strategy next to key components like talent acquisition, talent management, and compensation and benefits.
The benefit of this approach is that ESG is articulated clearly with designated objectives and outcomes related to the topic. The limitation of this approach relates to the sense that ESG responsibility only resides with the team that focuses on that pillar. This positioning could create a lack of shared accountability with other functions not actively contributing to ESG.
This approach might be a good fit for HR teams only starting with ESG initiatives as it allows the opportunity to first incubate skills and knowledge related to ESG. With active collaboration and alignment between different functions, this approach can provide a good foundation for ESG to deliver value.
Approach 2: ESG as a value underpinning the HR strategy
The second approach sees ESG as an integrated approach where all functions need to contribute to function-specific goals related to ESG. In other words, ESG becomes a shared responsibility.
This approach requires a broader and more intimate understanding of ESG to understand the different contributing factors. It is well suited to organizations that have established the foundational understanding and importance of ESG and allows ESG to be fully integrated into the organizational focus and culture.
The risk of this approach is that ESG is not actively monitored and reported upon as part of operational and strategic progress. If not monitored, this could lead to inaction.
“A significant undercurrent is the belief that ESG is for finance and economics people. Almost as if it does not affect the rest of the organization or the normal working population.
It is like saying, “Oh, like I breathe the air, but the air quality is not my concern.” It’s not possible. If you are living in this world, then sustainability is your concern. It concerns you, your business, your activity, and your job description. And just because the word sustainability isn’t in your job description doesn’t mean that there’s nothing for you to do with it.”
“When organizations go from a 15-person company to a 50 to a 100 to a 500, there are step changes in an organization that need to be reflected in your recruitment, people, and governance strategies.
And these are things that we historically have seen that technical leaders, as great as they are, aren’t able to build a strategy for. You can’t expect your CTOs and CEOs to have the intrinsic know-how to build such large HR processes.”
How HR can start driving ESG within their organization
The following actions can enable HR to build the knowledge, skills, and expertise required to champion the ESG agenda as part of the HR scope.
Action 1: Build knowledge by understanding current ESG frameworks and standards
First, HR must better understand the current ESG frameworks and the standards they refer to. Even though the scope of this article will not cover each of these in detail, the following frameworks are important:
Framework Description Resource UNSDG The United Nations member states adopted a set of 17 interdependent objectives as part of the 2030 sustainable development agenda. https://sdgs.un.org/goals MSCI A set of indexes developed by Morgan Stanley Capital that incorporate ESG-related factors to influence investor decision-making https://www.msci.com/ GRI The Global Reporting Initiative is an independent organization that provides principles and guidelines for reporting on ESG-related matters in a transparent and standardized manner. https://www.globalreporting.org/ TCFD The Task Force on Climate-related Financial Disclosures is a voluntary initiative that established a framework for companies to disclose climate-related risks as part of business operations. https://www.fsb-tcfd.org/ ILO The International Labour Organization sets labor standards and drives the agenda for decent work. https://www.ilo.org/global/lang–en/index.htm
Action 2: Analyze current HR practices and processes
HR teams can analyze current HR practices using these frameworks to assess the strengths and gaps that need addressing. For example, the ILO provides standards and guidelines to evaluate decent work practices.
The next step is to use data and people analytics to better understand the talent pools, inherent biases, and potential barriers to employment within the organization.
For example, a multi-national insurance business used labor data to evaluate their pay equity practices. Over three years, it managed to close the gender pay gap and start reporting transparently on pay.
Action 3: Bring a committee together to discuss ESG
ESG is a shared responsibility, and establishing an internal, cross-functional committee to discuss ESG matters is essential.
Participants of this committee need to include representatives from Risk, Finance, HR, Facilities, Legal, Corporate Social Responsibility, and Operations as a starting point and be empowered to make recommendations to the executive team on improving the ESG agenda.
Where ESG practices become more advanced, the organization should appoint a Sustainability Officer with a team that actively drives and manages ESG-related matters.
“If CHROs want to find their voice regarding ESG, this is a good time to differentiate themselves. With a sense of transparency, the power of factual reporting, and conveying a clear message, ESG is not about how organizations set themselves up after making money but how they make their money in the first place.
This is about the DNA of the organization, the business, the contracts, and what goes into that thought process. These topics are the fabric of both HR and ESG.”
Action 4: Create a clear stance on ESG matters for the organization to implement
For many, ESG remains a theoretical concept, and they don’t see the practical actions that can lead to a better future. The organization must develop a clear stance on ESG-related matters, defining its focus and priorities in a way that resonates both internally and externally. It’s important to create and clearly articulate the ESG strategy and goals, ensuring that investors, employees, and other stakeholders understand their practical impact.
Internally, within the organization, employees must understand how ESG is incorporated into how the organization operates and what is expected daily to deliver on the internally set goals.
Wrapping up
The HR contribution to ESG practices has to take priority in people strategies and practices going forward. For too long, ESG has not been perceived as a shared responsibility within the organization, and HR has a crucial role in ingraining ESG into organizational culture, values, and practices.
To do so, HR professionals must educate themselves on the available ESG frameworks and how they can be applied within their organizations to drive action.
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