Employment and diversity lawyers and the ‘S’ in ESG

Keith Corkan

Woodfines Solicitors, Milton Keynes

kcorkan@woodfines.co.uk

Introduction

As most employment and diversity lawyers know, the ‘S’ in environmental, social and governance (ESG) (social) includes matters such as diversity, equity, inclusion, employee treatment, job satisfaction and compensation, working conditions, human rights, health and safety, data protection, privacy, community relations and customer satisfaction.

As the ESG movement continues to grow, a further series of workplace issues has emerged, as this article aims to highlight. But first, it is perhaps instructive to see how diversity, equity and inclusion (DEI) has developed as part of the ESG debate, and how the present political and economic environment is affecting the progress which has been made, including the future prospects for ESG and DEI.

Diversity, equity and inclusion

Some studies show that companies adopting the highest levels of diversity and inclusion tend to have higher levels of productivity, performance and innovation, but the precise linkage is often not clear. There are also a number of studies which are inconclusive on this question, and the drive for greater diversity seems to result partly from it being seen to be socially desirable and the ‘right thing to do’, during a period in which ethics and corporate responsibility are a feature of the ESG debate.

Having a diverse board certainly does not insulate companies from failure, witness the plight of the highly diverse board of Silicon Valley Bank, which did not prevent the bank's demise.

Employers are, however, increasingly seeing the benefits of benchmarking in areas, such as gender pay, and ethnicity and disability pay gap reporting, during a period in which many governments are being slow to impose a higher level of mandatory reporting, with the UK government being an example.

DEI has arguably become subsumed within the broader, equally topical ESG debate, but employers are mindful that their focus on ESG and inclusion is facing some opposition on political and economic grounds. In many countries, diversity is becoming entrenched in the debate about woke capitalism, as employers come under pressure to continue to invest in diverse initiatives during an increasingly challenging business environment. Accordingly, the progress that many countries have made in recent years in relation to gender pay, board representation, governance and the environment is now seen to be at risk.

The position in the United Kingdom (UK)

Like many countries, the UK has experienced numerous taskforces reporting on raising the quota of female, non-white or non-privileged employees in order to widen the talent pool and eliminate risk by minimising groupthink. Such reporting risks being criticised as a ‘woke’ effort to extend ‘do-gooding’ diversity from gender and ethnicity to socio-economic background.

However, the evidence shows that initiatives are bearing fruit with female representation on the boards of FTSE 350 companies increasing to 40 per cent in a decade, and it is now becoming harder to argue that there are not enough experienced women to become chief executives or chairpersons.

The Women Leaders Review, a government backed campaign is pushing for every FTSE 350 company to have at least one woman in the big four jobs of chief executive officer (CEO), chair, finance director or senior independent director by the end of 2025. The progress made so far has come as a result of voluntary action rather than the quotas which France and Norway have introduced (the UK is second to France regarding female boardroom representation just ahead of Norway).

The numbers are, however, different when it comes to the CEO and chair roles in FTSE 350 companies, with women accounting for just eight per cent of the former and 16 per cent of the latter. One concern here is that women who become chairs usually get there after being a senior independent director, whereas men go straight to the chair role, according to the Global Institute for Women's Leadership at King's College, London.

This suggests that men are judged on their potential, while women are judged on their experience, which arguably amounts to bias or double standards. This, however, is disputed by those who believe that many women lack a general management track record ideally as chief executive and that this is limiting appointments as chair, rightly or wrongly.

The annual Parker Review published this month requires the UK’s largest private companies to have at least one ethnic minority director on their boards, as well as representation within the senior management team, and specifically FTSE 250 boards are required to have achieved this by the end of 2024.

Assessing socio-economic diversity is harder, and often statistics are disputed by both liberals and libertarians. The debate continues, however, about broadening the talent pool with moves to recruit from outside London, from state schools, and from a broader range of universities in order to improve social mobility.

The position in the United States (US)

In the US, in finance, women remain concentrated in the lower levels of companies and occupy less than 20 per cent of investment and management teams with most gains within human resources (HR), administration and public relations.

Women account for 27 per cent of partners in law firms and 39 per cent of the total headcount because of dropping out mid-career and leaving a smaller pool. Barriers are not, however, limited to childcare responsibilities and include a lack of opportunity, unconscious bias and lack of acknowledgement of women's success.

Even when women do manage to reach the top, they often leave in the belief that moving will advance their career more effectively than climbing the corporate ladder in their current company. The provision of paid family leave in 13 states has not stemmed this flow and there is a growing consensus that gender parity can only be achieved with government intervention, although it is hoped that the emergence of salary advertising in certain states will limit discrimination.

US businesses are however cutting back on their investments in diversity and inclusion as fears of a recession grow. Diversity professionals are struggling to prove their value to chief executives and that investments in racial equity, for example, have paid off. Many black professionals, however, believe that their experiences in major companies have improved since 2020, when diversity initiatives were stepped up following the murder of George Floyd, even though the consensus seems to be that much more work needs to be done to reduce discrimination.

DEI policies and strategies as extended

In the UK and elsewhere, HR directors are having to amend and upgrade their policies to include claims arising out of a new form of employee activism, particularly from younger employees who increasingly expect their employers to share their ethics and values and to speak out on social and political issues.

The business world has become familiar with greenwashing claims brought by regulators and litigants, where ESG credentials have been overstated or following environmental damage, quite often involving misconduct by management boards including cases disclosed by whistleblowers.

In the UK and elsewhere, employment tribunals are having to actively consider whether a belief in climate change should be a protected belief under the Equality Act 2010, and other cases are beginning to emerge which address the questions of so called ‘gender-critical’ views and the ‘clashing of rights’ in the workplace. The latter is perhaps best exemplified by the case of Maya Forstater v CGD Europe and others UKEAT/0105/20/JOJ, in which the Employment Appeal Tribunal held on 10 June 2021 that Ms Forstater's expressed belief that it is not possible for a male to become female was held to be a legitimate statement of her (protected) gender critical philosophical belief. Accordingly, her dismissal was held to be unjustified and discriminatory. This is, however, very much an evolving area of diversity law.

Boards of directors are realising that they need to be more open about what they disclose to investors and regulators, and that it can pay to go beyond strict legal requirements and provide more information to stakeholders about issues, such as pay equity distribution, ethnicity, disablement, turnover rates, health and safety incidents and the use of agency workers, particularly if an investment, merger or acquisition is contemplated with due diligence now expected to address these issues.

A failure to report voluntarily on certain ESG issues has for some prominent companies resulted in a downgrading by rating agencies. The UK government seems to have recognised the importance of gender and ethnicity pay reporting to younger employees and has promised a review and guidance in these areas. Although not bound to follow new EU directives, the UK government will be mindful of the fact that the EU Pay Transparency Directive, set to come into force this year, provides reporting requirements which exceed the current regime in the UK and will apply to a broader range of companies.

Such cultural trends may also result in menopause and fertility clauses becoming more prominent along with opportunities for flexible and hybrid working, with the UK government promising new legislation supporting a right to work flexibly from day one. City of London law firms are increasingly providing free counselling services to their staff.

Conclusion

Employment and diversity lawyers need to be conversant with a growing list of issues falling squarely within the ‘S’ category of ESG and need to be mindful of the responsibilities of boards to a wide range of stakeholders, including investors, regulators, shareholders and their own employees, in relation to such ‘social’ issues.

As in relation to most areas of employment law, the key is to have in place up-to-date policies and procedures which address the various DEI issues referred to in this article, and to provide timely guidance and support to boards and HR teams in relation to the drafting and implementation of such policies, along with the training of staff. 

Employment and diversity lawyers also have a key role to play in helping boards understand the aspirations of younger employees who now generally hold a different view of job satisfaction, which goes beyond pay and working conditions and encompasses well-being, ethics and values, all of which are essential to successfully attracting talent and investment.