The importance of the ESG movement to employment and diversity lawyers

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Keith Corkan
Woodfines, Milton Keynes
kcorkan@woodfines.co.uk

Introduction

Hardly a day goes by without the press reporting on a wide range of environmental, social and governance (ESG) issues increasingly with claims of ‘greenwashing’, as regulators, shareholders and other stakeholders scrutinise corporate performance to ensure that pledges and claims relating to climate change, gender diversity, inclusivity, racial audits and investment in various countries are accurately stated with a view to avoiding regulatory sanction, litigation or publicity campaigns by social media.

But how does all this affect employment and diversity lawyers and HR directors, if at all? Has the issue been overstated by the media and could it be said, (as many believe) that ESG is an arbitrary creation emanating from a range of academics and commentators without legitimate legislative or government sanction in many countries?

Many employers are nevertheless nervous about the publicity surrounding cases in which public companies have been visibly sanctioned by regulators for overstating their ESG credentials. Social media and technology have made it easier for critics and activist groups to monitor companies, to publicise and launch campaigns, effectively creating a serious risk management issue for employers with the risk of loss of customers, investors and employees if not properly handled.

Issues and obligations for employers

In addition to the plethora of international conventions and trade agreements which address the question of international labour standards, including those from the UN, the OECD and the ILO, (traditionally known as ‘soft law’); there is now an emerging body of black letter law in many countries which has the scope to penalise employers severely for failing to ensure compliance with international employment law standards. This includes the growing obligation to monitor global supply chains designed to eradicate human trafficking and other labour market abuses.

Geopolitical issues are becoming more relevant to companies with an increasing disruption to energy security and supply chains affecting many countries, all of which can affect companies’ policies on climate change and sustainability, and the need to explain any policy changes to shareholders and regulators.

Corporations are increasingly under pressure to express objectives and targets in relation to what many believe to be ill defined ESG goals. Such goals ideally need to address the environment, sustainability, safety and profitability, which in many industries may prove challenging.

Activities of regulators and greenwashing

These activities are increasingly being scrutinised by regulators and shareholders, particularly in the US where shareholder and union activism is increasingly demanding targets and audits from corporations in relation to the environment, gender pay equity and racial justice.

Regulators are carefully monitoring websites and information from rating agencies to assess the accuracy of ESG claims in an effort to prevent corporations from asserting unrealistic goals and targets which are designed to assuage investors, in short, greenwashing.

Substantial greenwashing fines were recently imposed by regulators at Deutsche Bank’s funds arm DWS and Bank of New York Mellon following misleading statements about green investments. These were considered to be the tip of the iceberg by many commentators.

In May 2022, Tesla, was removed from the S&P 500’s ESG index because of the lack of a low-carbon strategy and codes of business conduct, along with claims of racism and poor working conditions at the company’s factory in Fremont, California.

In July 2022, Stuart Kirk resigned from his position as global head of responsible investments at HSBC Global Asset Management following a controversial speech he gave in May in which he claimed that the climate risk to investing had been overstated, and that in his view, there is no place for ‘virtue signalling’ in finance.

The case not only illustrates the importance of companies having realistic ESG goals and being prepared to recognise dissenting views (Kirk believed he had extensive support) but also the risk of creating a wide range of potential employment claims and issues where disciplinary action is contemplated or taken against a senior executive who comments in good faith on highly sensitive ESG issues.

Modern Slavery Act 2015 and the single enforcement body

In the UK, the Modern Slavery Act 2015 requires companies with a global annual turnover of £36m to publish an annual statement summarising steps taken to manage supply chain risk including human trafficking and modern slavery.

Questions about the enforceability and effectiveness of the legislation has resulted in a wide range of proposals from the UK government and various bodies to improve reporting obligations, including the creation of a new corporate offence where there has been failure to prevent human rights abuses.

The UK government’s admirable proposal for a new single enforcement body to enforce the employment rights of a wide range of vulnerable workers with strong powers to impose financial penalties for failing to protect rights and combat modern slavery unfortunately seems to have become a casualty of the government’s change of leader, the energy and cost of living crisis and controlling the country’s borders.

Although the minimum wage in the UK has been consistently raised, enforcement by the tax authorities is under-resourced. Health and safety inspections have been reduced for the same reason, and partly to free up ‘entrepreneurialism’. Employers however need to monitor the risk of enforcement action particularly in the garment industry where so many labour abuses occur.

The P&O case

The public scrutiny of employers’ ESG credentials has arguably resulted in a wholesale re-evaluation of the established practice of HR managers ‘buying off’ employee claims by offering compensation in excess of contractual and statutory rights.

This was dramatically illustrated by the outcry following the deliberate failure by P&O to engage in collective redundancy consultation with hundreds of workers prior to their dismissals, and despite agreeing to pay compensation for the loss of those rights.

The Insolvency Service in the UK has controversially declined to launch a criminal prosecution for P&O’s failure to notify it of the process in advance despite this being a criminal offence.

Following the extensive adverse publicity and government investigation into the company’s practices, the matter has been formally referred by one of the unions involved to the International Labour Organization for investigation.

Gender pay equity and diversity

The #MeToo and Black Lives Matter movements along with Covid-19 have resulted in employers having to consider the social welfare of their employees to a greater degree, and perhaps not surprisingly, these issues have lent support and impetus to gender pay and diversity initiatives in many countries.

In the UK, gender pay gap reporting obligations have now been in operation for over five years and have recently been extended to companies with 50 or more employees. Levels of compliance have generally been high, and this has enabled employers to understand the importance of diversity issues to a greater degree, and specifically to appreciate the question of the relatively low representation of women in senior positions, the type of work they do and the impact of motherhood on career development.

Gender diversity is now firmly on corporations’ agendas. The issue is being monitored by employees, customers and regulators to a greater degree and has become a relevant item for pitch and tender documents. There is also a growing recognition that women increasingly outperform men in education and learning, and that the gender gap between competence and reward is growing in part because of resistance from employers in certain sectors, including the legal profession, unfortunately.

Such resistance to change can sometimes be seen at shareholder meetings. Take for example the experience of Amanda Blanc, the CEO of Aviva plc, who in May 2022, highlighted on LinkedIn sexist comments which had been made at the company’s AGM, and which subsequently went viral online. Blanc is one of only a handful of female FTSE 100 bosses and she called for more role models, more women in senior roles and more ethnic diversity in senior roles.

On this last point, the UK government has declined to make ethnicity pay gap reporting mandatory, although it has promised some guidance this summer. Many employers nevertheless are reporting voluntarily because of increasing demand by customers and potential recruits and the recognition of the importance of demonstrating that they are anti-racist.

In the meantime, in the US, BlackRock voted for a racial equity audit at Google’s parent Alphabet even though Google has effective diversity, equity and inclusion practices, in an effort to allow shareholders to monitor progress.

In France, new gender pay gap legislation is being contemplated following the success of the introduction of quotas for women on boards (2011) and executive committees (2021) with a 40 per cent target for the latter by 2030. The number of female directors at companies in France’s blue chip CAC 40 index has more than tripled in ten years reaching 46 per cent in 2021 with a lower average age because of the need to extend recruitment to more junior women with different experiences.

Global supply chains and geopolitical issues

Given these developments, the monitoring of global supply chains to ensure compliance with international labour standards is becoming requisite for employers and their boards. The interruption of supply chains became an issue for multinationals prior to the war in Ukraine, and this issue has become more acute in many industries because of the war, with efforts to onshore the manufacture of key components.

The war was originally seen as short term in certain quarters, but it has still called into question many corporations’ commitment to sustainability, and it remains a possible threat to carbon emissions reduction as energy sovereignty and green ambitions have become aligned with national security objectives.

Subsequently, asset management giants BlackRock and Vanguard have declined to stop new investments in fossil fuel projects and end their support for coal, oil and gas production. In the meantime, hacking groups have targeted companies which have been slow to leave Russia, but withdrawing from countries because of ESG issues has raised some difficult questions for boards, for example in relation to investments in China and Saudi Arabia.

US domestic politics and ‘woke capitalism’

Such climate policy reassessment has coincided with other Wall Street institutions pulling back from environmental positions in part in response to domestic political considerations, including attacks by certain US states for going ‘too far’ in their commitment to ESG.

In July 2022, West Virginia banned BlackRock, JP Morgan, Goldman Sachs, Morgan Stanley and Wells Fargo from banking activities in the state on the grounds that the banks’ ESG policies were weakening the state’s energy industries. The response from the banks was to talk up their business relationships with oil and gas companies in the hope of placating politicians in Republican-led states.

In Florida, Republican governor Ron DeSantis has pledged to propose legislation next year to ‘protect voters from the ESG movement’, which he accused of ‘targeting disfavored individuals and industries to advance a woke ideological agenda’.

In April 2022, DeSantis signed legislation to strip Disney of its special tax status in Florida after the company criticised the Parental Rights in Education law which restricts discussion of LGBTI issues in primary schools.

Such pushback on ‘woke capitalism’ at least as far as DeSantis is concerned, seems to equate growing ESG activism in support of a wide range of responsible social and environmental causes for the common good with individual rights, although there is certainly some overlap. Either way, such reaction to ESG initiatives quite often results in the denial of individual rights.

These sentiments resonated judicially in a concurring opinion by Justice Clarence Thomas in the US Supreme Court’s decision in June 2022 to revoke the constitutional right to abortion (Dobbs v Jackson Women’s Health Organization). Judge Thomas suggested that the court should reconsider the cases of Lawrence v Texas and Obergefell v Hodges and their landmark rulings allowing same-sex couples to engage in sex and get married.

Shareholder campaigns

As a result of California law prohibiting non-disclosure clauses in certain contracts, shareholders won majority support to exclude non-disclosure agreements in employment contracts on a national basis at Apple, IBM and Twitter. In addition, Salesforce, Expensify, Twilio and Microsoft have since pledged to discontinue the use of non-disclosure clauses in employment contracts.

Following Dobbs v Jackson Women’s Health Organization, a number of companies have been asked by shareholders to provide information about costs and risks to their business from greater restrictions on abortions. Boards should look out for Rhia Ventures, a non-profit organisation which is working with institutional investors to press companies on their access to abortion.

Conclusion

Given that so many ESG issues relate to gender and racial diversity, inclusion, minority rights and the monitoring of compliance with labour standards, both domestically and cross-border, employment and diversity lawyers are unavoidably at the front line and have a direct responsibility to boards to monitor and advise as appropriate. But these responsibilities may well be broader given the risk of campaigns by activists, pressure groups and unions through social media or at shareholders meetings, not to mention the increasing use of audit requests being submitted to employers seeking information about a wide range of social, governance and environmental issues.

Employment and diversity lawyers may well be best placed to monitor and highlight compliance issues and to anticipate campaigns and complaints in advance, particularly as many initiatives arise out of new legislation or case law, or where boards or HR seek to avoid collective consultation obligations as the P&O case demonstrates.

The emergence of a powerful ESG movement embracing so many just causes and interested parties shows no sign of abating, and despite some resistance in the US, the evidence suggests that its effects will be long term with risks too extensive to be ignored.