Essential ESG: Episode 9 – The ‘S' in ESG - Corporate Governance

In the latest episode of Corrs' Essential ESG podcast, Phoebe Wynn-Pope and Heidi Roberts focus on the 'S' in ESG.

Phoebe and Heidi discuss the primary question behind the social pillar of ESG, which is how can a company responsibly manage its relationships with its employees, the communities in which it operates, and the global social, political and economic systems?

Essential ESG is a podcast series presented by Corrs that breaks down topical issues affecting the rapidly evolving environmental, social and governance landscape in Australia and beyond.

Please click here to listen to the podcast.

Dr Phoebe Wynn-Pope, Head of Responsible Business and ESG

Heidi Roberts, Partner, Responsible Business and ESG

Phoebe: Welcome to another instalment of Corrs' Essential ESG Podcast being brought to you from the lands of the Wurundjeri people of the Kulin Nation. My name is Phoebe Wynn-Pope and I'm the Head of Responsible Business and ESG at Corrs. Today we are speaking with Heidi Roberts who is a partner in our Responsible Business and ESG group and the lead in our Human Capital working group. Welcome Heidi.

Heidi: Thanks Phoebe.

Phoebe: Today we are going to be talking about the 'S' in ESG. This is all based on the idea that companies are taking a responsible approach to their business activities. Can you tell us a bit more about how we should be thinking about that 'S' in ESG?

Heidi: Well first I think it is good to delve a bit more into what we mean by a 'responsible business' and what we mean is an organisation that holds itself accountable, considering environmental community (the social) and integrity (governance) considerations while conducting its business and this is what's referred to as ESG. There's different interpretations of the 'S' in ESG but the S ultimately requires an organisation to consider the people and communities that are impacted by their activities and this can comprise of both external communities, so the people and communities across the entirety of the value chain of the business and also the organisation's human capital or its internal community which comprises of employees and other workers as a key asset. So I think the primary question behind the 'S' in ESG is how can a company manage its relationships with its employees, the society in which it works and the global social, political and economic systems in a responsible way.

Phoebe: Absolutely. I wonder if you would elaborate a little bit on how you think organisations should be thinking about the people and communities in their value chain. This external piece of the 'S' in ESG that you've mentioned.

Heidi: Well when we think about evaluating a company's impact on people and communities across the entirety of its value chain, we're talking about a company's operations, supply chain, the end users of its goods and the effects that these might have on different stakeholders. Even when a project or activity has a positive social impact as its ultimate aim, I think organisations still need to be conscious of the human rights concerns across the whole supply chain as they seek to achieve this positive outcome. So for example, in the energy transition to net zero there are significant social risks to First Nations people due to land acquisitions and extraction and use of natural resources to build this renewable energy infrastructure. Another example would be the considerable risks of modern slavery in the sourcing of raw materials required for renewable energy systems. So I think assessing the 'S' therefore requires consideration of the human rights of all stakeholders and which of those human rights might be adversely impacted depending on who the stakeholder is or who the community is.

Phoebe: Yes that's right and we have another podcast which is discussing those unintended consequences in ESG management which people might want to refer to. That's the kind of 'S' along the value chain. What do we mean then about the human capital side of the 'S' and can you tell us a bit more about that?

Heidi: Yes, so the company's internal stakeholders, particularly its employees and other workers are a key asset. They are particularly valuable in organisations as we know need to take great care of them, it is in their best interests to do so. This takes into account for example issues like sexual harassment, inappropriate workplace behaviour, labour rights, wage theft, diversity and inclusion and some of these interact with more traditional areas of employment and labour law. What we are seeing though is increasing scrutiny and focus from regulators on these types of issues, particularly in the context of safety and psychosocial risks. The evaluation of risks in this context we think though goes beyond just the legal risks. It is really important to consider a larger social assessment looking at how cultural factors and non-legal requirements are posing risk to organisations now. This might include for example leadership diversity, how it affects governance within organisations and it might also involve analysing an organisations operational risks of modern slavery and human rights concerns.

Phoebe: Okay Heidi. So if we are speaking of the risks, how do you think about the risks that are associated with ESG and how they manifest?

Heidi: I think it is really helpful to think about three areas of risk to business which are attendant on potential or actual adverse human rights impacts. So firstly, operational risk – this includes project delays, risks that threaten the project's viability, it might result in increased project costs or low levels of staff attraction and retention. Responding to these kinds of operational risks and increasing that engagement can take a bit of time. For example, globally it is now taking double the amount of time to get oil projects off the ground compared with say a decade ago and more than half of delays are caused by non-technical problems including opposition from local communities. So that's operational risk. If we move into reputational risk, this focuses on maintaining high quality stakeholder relationships to build a business' social licence to operate. A range of stakeholders are challenging businesses human rights commitments these days and we are seeing shareholder resolutions in Australia and overseas. Increased consumer concern about ethical products and situations where there is a failure to appropriately engage with First Nations peoples is causing operational delays and reputational damage and if we think back to the operational risks I mentioned, I think we should keep in mind that organisations with a good reputation are more likely to attract and retain high quality employees, attract customers, investors. So in this way they are linked.

Phoebe: That's right and then you said there was a third category of risk?

Heidi: Yes, so the third category of risk is legal. In Australia and globally we are seeing increasing litigation arising from ESG issues including claims of misleading and deceptive conduct regarding statements on human rights commitments. Often by strategic litigants who are really looking to change corporations' behaviour. I think companies need to consider in this sphere compulsory but also more voluntary regulation and ESG reporting frameworks. So for example, gender based harassment and discrimination in the workplace is governed by Commonwealth and State anti-discrimination legislation. We have Workplace Gender Equality Act reporting for non-public sector companies with over 100 employees and we have some Victorian public sector gender equality reporting obligations, all on top of ASX governance reporting requirements.

Phoebe: Heidi I wonder if you could provide us with an example or recent example or ESG development to illustrate how crucial that 'S' aspect is becoming.

Heidi: Yes so a recent example – a global medical supplies manufacturer is facing litigation in the United States against the company. The action is taken by 13 Bangladeshi employees who allege that they and other workers were forced to pay extortionate recruitment fees in exchange for their jobs. It is also alleged that they were forced to work excessive hours, without access to food or water, that their passports were taken away and their movements were monitored and controlled. So I think the issue with the litigation is that the company was aware and had made disclosures in modern slavery statements of the risk or likelihood that some of these practices were going on. Indeed they reported they had taken a range of remediation measures to address some of these risks and incidents. The allegations are that despite this they didn't do enough to address and prevent modern slavery in their supply chain. So we are yet to see whether this leads to further litigation in Australia but it certainly should ring alarm bells for organisations in terms of taking actions to address the risks that they are identifying.

Phoebe: And there was huge impacts on the stock price at the time this case was brought in the US wasn't there?

Heidi: Yes there was.

Phoebe: That is very interesting and raises all sorts of questions about the identification, the assessment, mitigation and management of modern slavery risks in particular and possibly how important it is for an organisation to be able to demonstrate that it's mitigation, due diligence and remediation processes are adequate and appropriate. I wonder if you have any other examples?

Heidi: Absolutely. Over the past few years we have seen a number of organisations in Australia facing significant backlash over what have been considered inadequate responses when senior managers or leaders have engaged in sexual harassment. We've seen that announcements that employees who are found to have engaged in sexual harassment are being promoted or leaving their organisation with large bonus payouts have sparked public outrage and again there are operational, reputational and legal risks associated with this. In some examples the resignation of the CEO or board members which is highly disruptive in an operational sense to an organisation. In terms of reputation we've seen shareholder demands for action to be taken in relation to allegations or in terms of discipline. We've seen shareholder demands to disclose how sexual harassment complaints were handled and what the outcomes were and we've seen calls for public explanations of decisions to promote or pay bonuses or ex-gratia payments to people where allegations of sexual harassment have been substantiated. In some circumstances we've seen a negative impact on the share price as a result of these calls and of course there's the legal risk. So in addition to claims by victims we also see financial impacts of sexual harassment allegations, investor withdrawals and investors may indeed have further recourse to other legal action.

Phoebe: We have seen a huge shift in the last maybe couple of years around the issues of sexual harassment in the workplace and you've mentioned it several times throughout this podcast. I wonder if you could talk a little bit more about how companies are thinking about this as part of their human capital analysis.

Heidi: Yes, we've seen a lot of progress across the private and public sector to really address the scourge of sexual harassment at work. Perhaps most notably the Federal parliament recently passed amendments to the Sex Discrimination Act which imposes a positive duty on employers to prevent sexual and gender based harassment, sex discrimination and victimisation at work and we'll shortly be releasing another podcast with further detail on this development in particular. At the national level the Australian Human Rights Commission handed down their fifth national survey into sexual harassment in Australian workplaces and this comes after a couple of years in which the Sex Discrimination Commissioner was actively investigating, produced her report and has been communicating a lot with employers and employees, workers in the community and sadly the survey suggests that one in five people still experience sexual harassment at work every year. Only a third of Australian workers believe that their organisation is doing enough to prevent or address it. We've seen a rise in the number of enquiries seeking to understand the scale and the drivers of sexual harassment in the workplace, particularly in the mining industry. The 'Enough is Enough' report published by the Western Australian government earlier this year had really insightful findings into the drivers of sexual harassment in the FIFO mining industry and the drivers included the fact that the industry had a very small number of women working in the industry. It was very hierarchical, had a poor workplace culture where incivility and rigid male stereotypes and disrespect for women were just accepted as the way we do things here and the report also looked at the role of culture, alcohol, practice of moving on sexual harassers as opposed to dismissing them from their employment and the systemic under-reporting of sexual harassment in the workplace. Unfortunately these things are not limited to the mining industry and if you have a close look at the Sex Discrimination Commissioner's report – Respect@Work you can see that these drivers are present in quite a number of industries and workplaces. So in light of these findings a lot of these reports have called for companies to improve their gender balance in the workplace, to understand the gender based cultural drivers of sexual harassment or other gender based harms and particularly to look at the prevalence of sexual harassment in their workplaces and what they can do to prevent it rather than just respond it to when it happens.

Phoebe: So we've talked today really up and down the whole of the value chain. We've talked about modern slavery, sexual harassment, some First Nations issues. Some of the complications as we move towards a net zero economy. This huge spectrum of issues. How can organisations be thinking about how to deal with this range of concerns and what is the best way forward for them? How do you think that they can build it into for example their ESG framework?

Heidi: Yes, there's a lot to think about and there is no off-the-shelf template for an effective ESG framework but there are some common elements and these are often best guided by the UN Guiding Principles on Business and Human Rights, or the UNGPs. The UNGPs are the globally recognised best practice guidelines for the implementation and operationalisation of how business enterprises should respect human rights. To fulfil their obligations under the UNGPs, organisations need to carry out human rights due diligence. So this includes assessing the actual and potential human rights impacts of their operations and then integrating and acting upon the findings, tracking the responses to that and communicating how impacts are addressed. Organisations also need to put in place grievance and remediation mechanisms. I think the important thing is that this is ongoing – human rights due diligence is an ongoing activity and you need to recognise that the way that your business impacts on human rights risk can change over time depending on how your operations change, but also how the operating context changes around you. So this needs to be built into any ESG framework so you can ensure that you are addressing the 'S' in ESG in a manner that continues to grow and develop as your operations change.

Phoebe: Heidi thank you very much for that I think it is a great piece of advice and a good place to finish for today and I'm very much looking forward to your Respect@Work podcast in the near future.

Heidi: Thank you.

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