Future trainee solicitor Isabella Mason considers the implications for law firms
Environmental, Social and Governance (ESG) refers to a set of standards that companies voluntarily consider in efforts to demonstrate transparent and ethical behaviour in business decisions and operations. Institutional investors use ESG standards as a measure of how well a company performs in order to make informed choices on potential investments in attempts to be responsible investors.
We have witnessed how environmental awareness is on the rise in companies and organisations, evidenced in disclosures made and greener initiatives adopted. This can be attributed to increased pressure from investors and the UK government for companies to become more sustainable in their practices. While the coronavirus outbreak has alleviated focus on environmental concerns, it has notably drawn attention to social issues arising from the pandemic.
Prior to the COVID-19 pandemic, institutional investors often focused more on the ‘E’ and ‘G’ of ESG. The ‘S’ is arguably more tangible in nature, it is therefore difficult to provide adequate quantitative data that clearly demonstrates how social issues influence company performance. However, the pandemic has exposed heightened scepticism and public opinion in respect of the varying responses from corporate firms, and, in turn, stressed the importance for companies to take these issues seriously in order to foster long-term success.
‘Social’ is a very broad term but for the purposes of ESG includes employee health and safety, workforce conditions, employees’ rights, human rights, modern slavery and stakeholder and community engagement. Specifically, COVID-19 has illustrated the significance of employees’ rights and maintaining employee safety, with trade-offs regularly considered by companies to effectively balance stakeholder needs.
Social issues are permeating media, with added pressure on companies to review their practices so that when employees return to work, they will be adequately safeguarded, and social distancing measures in place. Additionally, companies have adapted swiftly to support employees working from home, ensuring technological capabilities, and support with sick leave and caring responsibilities. The provision of mental health support for employees has also been vital for ensuring wellbeing during unprecedented, uncertain times.
As a result of a social-related accumulation in the news, the ‘saints and sinners’ of the crisis have been revealed, displaying both ends of the spectrum in corporate responses by various well-known companies. For example, Amazon has come under fire for unsafe work practices in which whistle-blowers raised employees’ concerns about COVID-19 risks and were subsequently fired. Tim Bray, the vice president of Amazon, consequently resigned in protest. The Frasers Group, more commonly known as Sports Direct, has faced criticism for attempting to keep outlets open at the beginning of the lockdown, deeming opening as “essential” in contravention of government guidelines. With such response, this has attracted substantial negativity and understandably places more pressure on the companies to prioritise employee needs.
Some companies have set better examples by engaging and addressing stakeholder needs directly. Supermarkets such as Sainsbury’s and Morrisons responded rapidly to the pandemic by providing additional assistance for older people and other vulnerable shoppers. L’Oreal demonstrated forward-thinking by paying small and medium-sized suppliers early to help them survive the current crisis.
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For companies like Airbnb, pledges were made by the chief executive that the business would become a “stakeholder” company, serving employees and society as much as future shareholders on the basis of an Initial Public Offering (IPO) being conducted. Unfortunately, with decreasing revenue, 1,900 jobs were cut. To respect the pledge, the chief executive endeavoured to cut the jobs in a “responsible” way by ensuring those who lost their jobs had a further 14 weeks of pay, a laptop, job advice and health insurance for a year.
So, why does ‘S’ matter during a pandemic specifically? The increased attention of the social element of ESG is important, not only for investors but for companies moving forward through the pandemic, since a strong social performance will translate into long-term benefits such as improved business performance and promotion of relationships with local communities. The pandemic has undeniably exposed inequalities within companies whereby employees are prioritised far less than shareholders.
Typically, in times of crisis, a shareholder-driven approach would be adopted to navigate a company’s way through a recession. However, as a result of evolving attitudes, there is pressure exerted by investors to cut dividends to shareholders so that companies stay afloat, and employees are prioritised. Such approaches may lead to more employee satisfaction resulting in loyalty to employers in the long-term. Those who demonstrate better ESG credentials during the pandemic will likely come out stronger and more resilient against their competitors.
Although quantitative data in respect of ‘S’ has lacked previously, the importance of social issues is amplified with quantitative evidence obtained by an ESG data group, Truvalue Labs, using artificial intelligence. The group tracks corporate responses to the pandemic that are reported in the news. The group calculated that 73% of all ESG-related news in the days leading up to when the results were produced were linked to COVID-19. In particular, 49% of that data represented news on employee health and safety labour practices. In spite of such data, companies will be concerned with short-term issues such as disruptions in operations and supply chains, as well as unpredictable customer behaviour, undoubtedly presenting financial risk. It is encouraging that more companies are adopting a stakeholder-focused approach, therefore better adapting the company for future crises. There is strong ground to suggest that strong risk management now will yield less detriment for companies should another crisis occur in the future.
What are the implications for law firms?
As a result of COVID-19 flagging social issues as a priority, work for the legal profession will no doubt be flourishing. Lawyers will be advising businesses on key decisions regarding workers, suppliers, customers and other stakeholders. In the short-term, measures companies adopt need to be managed appropriately to mitigate risks of litigation in the long-term. Companies are also working with lawyers to consider adding standalone “coronavirus clauses” to employment policies that would take into account sick pay, quarantine leave and employer obligations to employees in ensuring employee safety. Such clauses may provide certainty for employees in unprecedented times, as well as lessening fears of job losses.
What next in a post-pandemic society?
Although COVID-19 has drawn attention to employee rights, human rights must not be overlooked post-pandemic. Companies will be considering the temporary measures required to prevent significant financial and reputational fallout, but this does not discount the requirement for responses to be reasonable and proportionate to ensure human rights are upheld. Such rights include, the right to health (including the right to access healthcare) and the right to freedom of movement. When companies consider restrictions in the workplace and quarantines for those contracting COVID-19, measures must be proportionate, safe and imposed in a non-discriminatory way.
Going forward, it is essential companies prioritise social issues to alleviate detriment to the long-term success of the company. It is clear that an enlightened focus on employees and other stakeholders maintains solidarity and promotes companies as desirable places to work and do business with. Social issues resulting from the pandemic will not be erased immediately, therefore providing strong ground for ‘S’ to be considered on an equal footing with ‘E’ and ‘G’. The pandemic has proven ‘S’ is just as important, especially as individuals’ wellbeing and livelihoods are at stake.
Isabella Mason studied law at the University of Hull. She has completed the LPC and is due to commence a training contract at Taylor Walton from September.