Putting the "S" in ESG: Investors Place Increased Responsibility on Employers to Foster Diversity and Positive Corporate Culture

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ESG — or Environmental, Social, and Governance — refers to a wide range of considerations that impact a company’s performance, both in the public markets and within its internal culture. In the wake of the #MeToo and Black Lives Matter movements, employers have been called upon by their shareholders and investors to emphasize the “S” in ESG and to take action to address sexual harassment, racial injustice, and other inequalities in the workplace.

Investor Initiatives Prioritize Diversity and Inclusion

Most recently, several investment firms have called upon corporate leadership to lead the way in making substantial changes to how companies serve their shareholders, employees, and communities. For example, in 2019, the Chairman and CEO of BlackRock, Inc., a multinational investment management corporation and the world’s largest asset manager, issued a letter encouraging companies to align their corporate “purpose” with better serving all stakeholders. BlackRock called upon its companies to increase board diversity, provide compensation in line with serving and retaining quality talent, and focus on human capital management. Consistent with these objectives, in September 2020, BlackRock revealed that in the prior year alone, it voted against board directors more than 1,500 times for insufficient diversity.

Following in BlackRock’s footsteps, other investment firms have also placed diversity initiatives at the forefront. BNP Paribas Asset Management and Legal & General Investment Management (LGIM) have also supported diversity-focused resolutions this year, with LGIM supporting 21 such proposals put forward by shareholders of its portfolio companies, including Amazon. In 2020, Goldman Sachs announced that it would only help take public those companies with at least one diverse board member, with that number increasing to two diverse members in 2021.

In 2019, Nasdaq launched its ESG Reporting Guide, imposing additional pressure on employers to institute policies encouraging social consciousness in the workplace. Although Nasdaq does not require ESG reporting by its rules, its ESG measures are encouraged in order to guide employers in finding the best route to “improve operations, enhance strategy, broaden risk oversight, or engage with new investors.” Among the social data Nasdaq emphasizes are compensation considerations, such as CEO pay ratio and gender pay ratio; corporate culture and employee turnover factors, including gender diversity and non-discrimination; safety and health metrics; and human rights issues.

Pressure for internal social reform is not limited to private investors and stockholders. At both the state and federal level, government initiatives are taking hold. Several states have instituted pay transparency laws requiring that employers disclose the wage or salary range for positions at varying levels of the application process (e.g., Nevada requires employers provide the wage range to applicants who have completed an interview whereas Colorado imposes a more onerous standard, requiring employers disclose the wage range in any job posting). Other states have implemented laws protecting victims of sexual harassment, including laws preventing non-disclosure agreements in settlements relating to sexual harassment and other laws increasing sexual harassment claimants’ ability to litigate their claims.

At the federal level, President Biden has promoted his own ESG agenda since his campaign for the presidency, setting forth “The Biden Agenda for Women” intended to “further women’s economic and physical security and ensure that women can fully exercise their civil rights.” And recently, on June 26, 2021, the House of Representatives voted to pass the ESG Disclosure Simplification Act of 2021 (H.R.1187) which would require the SEC to define ESG metrics to guide required corporate disclosures.

In coming months and years, employers can expect to see mounting pressure not only from the private sector, but from governmental entities as well.

What Employers Are Doing to Meet Demands

With employers feeling the pressure to meet the demand for corporate social reform, employers have been reevaluating their social policies, procedures, and priorities to rise to the challenge. While such measures, such as ESG audits and internal reform, are certainly encouraged from the investor perspective, it is important that employers who commit to such initiatives show equal commitment to following through to implement changes after identifying areas for improvement.

Although these ESG efforts are still developing and evolving, certain patterns and creative attempted solutions have emerged in these initiatives, including:

  • Increasing “top down” diversity, from the board, to management, to the workforce.
  • Periodic refreshing of board membership.
  • Conducting pay equity audits.
  • Increasing training on preventing, responding to, and investigating claims of workplace harassment.
  • Improving internal record-keeping and reporting of sexual harassment complaints.
  • Implementing policies to recuperate compensation made to executives during periods of fraudulent activity or misconduct, including sexual harassment.

In addition to diversity and other non-discrimination initiatives, employers are offering additional social programs to improve company culture and encourage employee retention. Some creative initiatives include:

  • Permitting remote work for the long-term.
  • Increasing the company’s presence in the community by engaging in philanthropic efforts, such as serving underrepresented communities.
  • Offering financial literacy programs, such as matching student loan payments, instituting employee emergency savings programs, and providing financial assistance.

Even without engaging in new and creative initiatives, there are still steps employers can take to meet demands for increased social awareness, such as reviewing their current policies and comparing them to current practices; considering the effectiveness of current training regarding employment policies like harassment, discrimination and retaliation; and reviewing HR-related documents, policies, and practices and consider potential improvements to better serve the needs of the company and all employees.

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