So-called “greenwashing” class actions are emerging as a big risk for companies making sustainability claims. Most recently, a court in California threw out a claim against e-commerce site Etsy, albeit with leave to amend. Plaintiffs allege the company’s carbon offset promises are false. Allegations including fraud, misrepresentation and deceit are mostly focused on retailers and business-to-consumer organizations.

The rise in claims comes as confidence in carbon offset promises has fallen. Companies including food giants Nestle are now seeking alternative routes to net zero. Elsewhere, fashion house Gucci has removed claims of carbon neutrality from its website.

In the light of potential legal implications, sustainability claims must be supported by data-driven evidence. As sustainability reporting expands, that extends to employers who claim they have achieved pay equity or are pay equity certified.

Supporting sustainability claims

SAP research shows that businesses committed to sustainability enjoy improved profitability and growth, better quality products and services, and increased efficiency.

But progress towards sustainability has stalled and employers are struggling to achieve their goals or support those claims. Less than one-third of US employees work in organizations that embed sustainability goals in business models and employee roles.

Adopting a strategy of pay equity can help to change that.

Pay equity is integral to sustainable business practices

Pay equity is an essential component of the EU’s Corporate Sustainability Reporting Directive (CSRD), effective from January 1, 2024.

For instance, ESRS Standard 1 requires employers to disclose:

“the percentage gap in pay between women and men and the ratio between the compensation of its highest paid individual and the median compensation for its employees.”

Its purpose is to enable employers to evaluate pay gaps and identify any “wide pay disparities.”

ESRS Standard 2 also requires employers to explain their approach to managing any impact on areas including:

“equal treatment and opportunities for all (for example, gender equality and equal pay for work of equal value…)”

The CSRD more than quadruples the number of companies required to report on sustainability. Over 50,000 European organizations in EU member states are affected, alongside 10,000 non-EU companies, including 3,000 US firms.

It also states:

“Sustainability reporting standards that address gender equality and equal pay for work of equal value should specify, amongst other things, information to be reported about the gender pay gap, taking account of other relevant Union law.”

Outside of the EU, IFRS S1 Financial Reporting Standards on sustainability refer to external standards that may incorporate elements of pay equity.

Support sustainability claims with pay equity software

Your business only has pay equity if your employees say you do, and for some employers, that’s a problem. Nearly one-third do not believe their pay is equitable, which erodes trust in business, and can impact retention and your brand reputation.

Rising pay equity claims also reinforce the urgent need for employers to make factual sustainability claims. For employers that claim to have achieved pay equity, conducting a pay equity analysis is essential to provide supporting evidence.

Carry out an intersectional pay equity analysis

Utilizing pay equity software helps to identify pay disparities, prevent new inequities, and generate regulatory compliance reports.

To achieve true pay equity, we recommend an intersectional pay equity audit. That’s because the traditional approach towards pay equity analysis adopts a one-dimensional approach, which misses the full picture. A single-demographic audit can lead to a potentially harmful analysis, as it doesn’t disclose the full extent of pay disparities.

Without an intersectional audit, sustainability claims linked to pay equity may be inaccurate and increase your risk of class action lawsuits.

Trusaic PayParity carries out a pay equity analysis through the intersection of gender, race/ethnicity, and age in a single statistical regression analysis.

Partner with a pay equity software provider you can trust

Pay equity claims must be supported by data driven evidence, to prevent pay discrimination claims, and comply with EEOC Title VII guidance. Title VII guidance makes it clear that employers cannot delegate responsibility for AI bias to their software vendor. Nor can they rely on their vendor’s assurance that its software is Title VII compliant.

Based on EEOC recommendations, your pay equity software provider must demonstrate that:

• Its software does not cause an “adverse” or “disparate impact” and it has relied on the four-fifths rule.
• All employment-related AI tools have been evaluated to ensure compliance with workplace laws. This includes an audit of all AI functions to identify and remove potential bias. To support sustainability claims, the vendor must provide proof of this to employers.

If the vendor’s assessment of its software is inaccurate and leads to pay transparency claims employers could still be liable. This would also affect sustainability claims.

Advancing equal pay for all workers is one of six targeted priorities named by the EEOC in its Strategic Enforcement Plan.

Promoting social responsibility substantiation

Despite suggestions of a backlash during 2023, responsible business practices are here to stay. What’s more, 96% of employees expect their employers to pursue a sustainability agenda, and ensure factual sustainability claims.

That’s not all.

On September 19, 2023, The EU reached a provisional agreement on new rules to ensure social responsibility substantiation. Its Green Claims Directive aims to prevent “greenwashing,” increasing the pressure on employers to support sustainability claims.

An intersectional pay equity analysis is your starting point.