The Importance of Refocusing ESG Commitments
#evolve Magazine
March 09, 2023

In 2020, more companies began to conduct more public goal setting around human capital management, responding to growing waves of pressure from investors, social-justice activists, consumers, and rank-and-file workers. Within organizations, such goals generally fall into the “social” slot of their environmental, social and governance (ESG) frameworks, which are designed to make those organizations more equitable and sustainable.

It’s become more of a social norm now to expect corporate action on human capital management, which typically include pledges to address equity around pay and staff roles for women and people of color by certain dates. But those pledges haven’t necessarily been matched by action. According to a 2021 survey by PwC nearly half of consumers expect companies to take action around HR matters like DEI, but 64% of business leaders “expressed disappointment that [DEI] commitments are not yet showing desired results.”

Some companies may have overestimated reasonable goals around the “S” in ESG. Others may have done little more than pay lip service to its importance, said Maria Colacurcio, CEO of workplace-data firm Syndio.

“I think some of them are still in performative-land,” she said. “I think the best way to flesh out who’s performative and who’s not is to look at their disclosures. What are they transparently talking about? If they made a commitment in 2020 to add a DEI leader and you haven’t heard anything from them since, that’s probably a good sign they’re not taking this seriously.”

The conversation about human capital management metrics — and how to make them meaningful — will likely intensify in 2023. The Securities and Exchange Commission (SEC) is expected to announce new requirements around personnel disclosures, following up on 2020 rules on staffing, retention and safety. Some companies, anticipating such a move, have already taken action: A Harvard Law School report last summer found a spike in disclosures around gender and racial employee demographics, as well as data on employee engagement, talent retention and employee wellness.

As that conversation deepens, companies will want to look for more detailed and meaningful data about their staffing and be forward-looking about what more they’ll need to measure to achieve their goals.

“We know something is coming down the pipeline,” said Kevin O’Connell, ESG trust solutions leader at PwC US. “So, it is imperative for companies to begin developing a strategy for collecting, measuring and reporting on human capital data and to track progress over time.”

Looking at Leadership

One potential target area for SEC scrutiny is race and gender equity in senior leadership positions and the boardroom, in the wake of concerns about the diversity of leadership pipelines and state-level legislative activity concerning the makeup of corporate boards.

The REIT Veris Residential established ESG goals in 2021, and among them was gender parity at the management level by 2025. Setting that goal was the job of a dedicated task force made up of management and one board member, who determined it was achievable, according to Karen Cusmano, senior vice president, head of sustainability and ESG at Veris Residential.

In 2021, she said, women represented 40% of the company’s total workforce and 39% of management. Getting to that 50% goal will involve a lot of data gathering, including “a benefits audit to ensure gender sensitivity and parity in pay and work, while frequently conducting employee surveys, which provide insights into how we are doing regarding our efforts toward inclusivity and belonging,” Cusmano said.

Such efforts, beyond their inherent fairness, have become more of a business imperative, said Mark Rosen, managing director at the compensation consultancy Pearl Meyer. And because current and prospective employees are paying more attention to those metrics, there’s more pressure to get them right.

 “You need to show that you’re an employer of choice — people want organizations to align with their values,” he said.  

That’s why companies should look beyond overall retention metrics and look at retention across tiers, especially in leadership positions. 

“How are you retaining people at different levels, and are you moving the right people through the pipeline?” Rosen said. “It’s one thing to hire people. But you have to make sure you’re keeping them, identifying high performers and making sure that they stick with you.” 

Colacurcio agreed that leadership requires extra scrutiny. “Companies are looking beyond board [makeup] and starting to look at leadership teams,” she said. “They’re thinking about EEO-1 disclosures and breaking them down demographically: Where do people sit in the organization? How many people there are, and breaking down their background and gender, race-ethnicity split, from junior levels all the way up.”

“You need to show that you’re an employer of choice — people want organizations to align with their values.”

Board and Staffs

Many companies have learned that establishing human capital management/DEI metrics and building achievable goals around them is a holistic task. Leaving it at the desk of the CHRO or a new DEI chief is unlikely to lead to much forward movement, said PwC’s O’Connell.

“Lack of coordination across HR, IT, and accounting and finance — which is already well-versed in reporting to investors and regulators — is commonplace,” he said. “Many companies already have a sustainability group or officer issuing an annual corporate responsibility report, but they may not be integrated with HCM decision-makers like CHROs or chief diversity officers who are critical to telling the story and developing a diverse and inclusive workplace strategy.”

That risk of disorganization, combined with pressure from investors and other stakeholders, has prompted corporate boards to be more proactive — demanding around metrics and action, according to Mallory Bucher, associate director of corporate governance content at the National Association of Corporate Directors, whose 2023 Governance Outlook report included a dedicated section on board members’ increasing engagement in ESG. 

“Boards are looking at engagement, workplace dignity, rates of completion of ethics and harassment training, adverse media mentions, employee well-being,” Bucher said. “This goes far beyond what boards in the past focused on around human capital — it was usually related to CEO succession planning and compensation. Now they’re realizing that they really do need to expand that oversight and not just let management handle it.” (One measure of that increased engagement: Nominations for NACD’s annual DE&I awards nearly quadrupled between 2021 and 2022.)

Boards have also been more proactive around connecting executive compensation with meeting ESG goals, which have had mixed results. A New York Times report on the World Economic Forum gathering in January in Davos, Switzerland, found that some CEOs have been pushing back against an overemphasis on ESG metrics, especially around environmental goals, where the set targets are now often seen as overly ambitious.

Similar concerns follow the “S” part of ESG, and Rosen said that goal setting around personnel, especially DEI, can risk lapsing into quota systems without a broader strategy behind it. 

O’Connell also saw similar risks. “With brand-new types of metrics, it’s possible to discover that you’ve incentivized the wrong behavior. An executive team might be able to meet emissions goals with a big spend on a carbon sink, for example, or meet D&I goals with a short-term hiring blitz at the end of the year,” he said. “However, these methods may sacrifice long-term shareholder value for the sake of hitting short-term targets.”

Regulations on the Rise?

More requirements around human capital management are likely coming: SEC chair Gary Gensler has stated it as a priority, and its Working Group on Human Capital Accounting Disclosure offered guidance last summer around potential additions. While the specifics are still uncertain at press time, experts said the focus will likely be on requiring greater transparency around personnel demographic breakdowns (especially in executive teams and the boardroom) and pay gaps throughout the organization. Requirements to share EEO-1 forms — workplace demographic breakdowns that companies with more than 100 employees and a large proportion government contractors are required to share with the Equal Employment Opportunity Commission — may be on the table as well. 

“Specific social metrics we predict to be included in their proposed rules are the number of part-time versus full-time workers companies have employed, workforce stability and turnover, employee compensation, including defined benefit or defined contribution plans, and diversity across levels of seniority,” O’Connell said.

But companies shouldn’t wait, though, said Syndio’s Colacurcio. “Companies are starting to understand that they get credit from their employees in terms of trust when they’re voluntarily being more transparent than the law requires,” she said. “What we’re seeing is that companies are taking a step toward transparency because they’re realizing if they’re doing it as a reaction to legislation, like with pay transparency, they don’t get as much credit.

Colacurcio added that she expects more proactive companies to begin looking at metrics around the median pay gap — distinctions between pay at the highest and lowest levels, demographics around promotions and overall promotion practices.

Similarly, O’Connell recommended that companies begin planning ahead, not just sharing data but the strategy behind it. 

“Disclosures should be supported by effective controls and procedures, showing that the movement toward a data-driven approach has started, and will continue to evolve in preparation of expected disclosure updates,” he said.  

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