ESG and Human Capital Management Are the Keys to Resilience and Transformation
The COVID-19 pandemic materially altered how corporate boards should be thinking about enterprise sustainability through the lens of environmental, social, and governance (ESG) initiatives. The concept of stakeholder capitalism—and its link to enterprise sustainability—has taken firm root in corporate governance and workforce management.
Consistent with the Business Roundtable’s 2019 articulation of the new corporate purpose, 2021 begs for a more expansive view of organizational success—one that puts all stakeholder (employee, customer, shareholder, and community) interests at the heart of the transformation agenda.
It is clear that ESG and stakeholder capitalism will and should have a growing presence in the boardroom and on the board agenda. For example, 67 percent of nearly 2,000 global director respondents in the Global Network of Director Institutes (GNDI) 2020-2021 Survey Report indicate that COVID-19 will increase board focus on ESG, sustainability, and stakeholder value issues. In addition, 39 percent identify meeting the challenges of stakeholder capitalism as one of their top three challenges in responding to the pandemic.
Mercer’s 2020-2021 Global Talent Trends Study reveals similar concerns within an organization. Sixty percent of US human resources (HR) leaders say that they have maintained or stepped up their pace in moving toward an ESG and multi-stakeholder approach to business over the last year. Over half (53 percent) of these HR leaders are now tying ESG objectives to their corporate purpose, and 26 percent are linking these objectives to executive scorecards. In addition, more than one-third of surveyed employees indicate that their choice of future employer would be influenced by the employer’s articulated corporate purpose.
Meanwhile, two-thirds of organizations report that ESG will be a crucial focus for 2021 (71 percent said the same in Europe; 67 percent in the Asia-Pacific region; and 61 percent in North America). The United States clearly has room to grow on this agenda item.
Managing people risk effectively will be critical to future success and sustainability in an uncertain economic and social environment. Stakeholder empathy, particularly in relation to employees, emerged as a top leadership concern in 2020, and is likely to persist as an important component of sustainability, with two in five HR leaders at US companies saying that managing employees inclusively and with empathy will be a key to enterprise resilience going forward.
Indeed, the study finds that organizations that integrate ESG metrics into the CEO’s agenda are more likely to report high revenue growth. Also, investment funds that focus on organizations that prioritize ESG often generate returns superior to those of other funds.
Given the rising emphasis on people and ESG, with a particular focus on the diversity, equity, and inclusion (DE&I) aspects of social corporate objectives, boards must turn to the old adage that you cannot manage what you do not measure and ask their management teams to map out how their organizations will track, monitor, and drive forward their ESG and DE&I program goals. In fact, the GNDI survey reveals that 63 percent of directors see an increased need to incorporate data analytics into the board decision-making process. Boards may wish to ask management, for example, what DE&I analytics and metrics will be tracked and how and when these will be reported. Is the organization considering an internal labor market analysis to assess representation deficits across the company’s hierarchy and to identify specific pain points (e.g., hiring shortcomings, career “ceilings,” and points of retention risk)? The board or committees can also consider links between DE&I goals and incentive plans. Increasingly, investors evaluate companies based on their human capital management and DE&I metrics, such as those pertaining to representation, equity in pay and benefits, and attrition rates by demographic group.
However, only 23 percent of organizations say they will be investing in DE&I analytics and insights in 2021. This is disappointing, given that Mercer’s talent research attests to the impact of analytics in making DE&I progress and the disproportionate toll COVID-19 has taken, for example, on women in the workplace.
Nonetheless, a recent Mercer executive rewards pulse survey of around 1,000 North American organizations finds that nearly half (44 percent) are currently using or considering the use of ESG and DE&I metrics in their incentive plans to promote a focus on related objectives. That said, practices vary significantly, ranging from the majority of companies having no linkage between executive pay and human capital management and DE&I goals, to Hyatt Hotels, which made increasing minority representation across various levels of management in the United States and globally the sole metric in its most recent long-term incentive awards. For most companies, the right answer will fall somewhere in between.
On the bright side, last year saw a fivefold increase in the number of companies measuring pay inequity against 2019 levels, helping to boost the business community’s understanding of large gaps in health and wealth across numerous constituencies. In 2021, 45 percent of HR leaders in the United States (and 35 percent of HR leaders globally) plan to improve pay equity analytics to drive transparency and action.
The bottom line is that decision-quality data is at the heart of charting an enterprise’s course toward people sustainability and organizational performance. Companies that fail to invest appropriately will inevitably find themselves struggling to attract, retain, and engage the diverse talent needed to succeed in today’s marketplace.
Eric Larré is a partner in Mercer’s executive rewards business in Atlanta. He works with corporate boards to develop incentive programs that align with financial and strategic objectives and investor expectations.