Domestic and international market pressures, as well as regulatory change in the UK, highlight why workforce issues should be examined through the lens of environmental, social and governance (ESG) principles.
ESG considers workforces to be an asset that must be protected through good management, because businesses with well-managed workforces are more likely to be sustainable in the long-term.
According to Workforce Disclosure Initiative (WDI) data published in April 2023, the value of ESG data globally is expected to reach almost $34tn by 2026.
“As a result, the risks associated with poor workforce management, which falls under both the ‘social’ and ‘governance’ aspects of ESG, can no longer be ignored by the investment community or companies themselves,” the WDI said.
This focus on ESG considerations has been heightened in recent months by a new stream of regulations that will impact workforces.
In particular, the EU Corporate Sustainability Reporting Directive (CSRD) will be influential internationally as it drives up conditions by requiring granular disclosures that satisfy 14 draft reporting standards. These include disclosures on a business’ own workforce and value-chain workforces.
Separately, two developments relevant to UK corporate governance will impact many employers’ ESG strategies, especially regarding gender pay gaps, diversity and inclusion (D&I) and whistleblowing.
New UK non-financial reporting obligations
Last month, the Department of Business & Trade (DBT) opened a consultation on new non-financial reporting obligations. The need to bolster mandatory non-financial disclosure frameworks is internationally recognised, as investors want ESG information to value and benchmark companies.
This consultation will be an important stage in the UK developing a reporting framework that goes beyond financial information and, more recently, some climate-based information. Comparisons will be drawn to the CSRD.
The government consultation is very early stage evidence-gathering, and there is little to hint at what any future framework might look like.
The government will use the information collected to develop detailed proposals for public consultation next year. Workforce information already has to be included in some companies’ annual reports but it is fairly limited. For example, some disclosures are needed around how directors have had regard to the interests of employees and employee engagement.
Some statistical information is also needed, including disclosures around the gender of directors, senior managers and employees, and disclosures around CEO-to-employee pay ratios. Given the depth of employment information that the EU will be mandating companies to disclose under the CSRD, it seems likely that UK employers should expect far greater public exposure of workforce matters.
As part of this review, it is significant that the government is also taking the opportunity to look at gender pay gap reporting, although none of the survey questions in the evidence-gathering specifically address this.
The UK government was obliged by the gender pay gap regulations to review them by the end of a five-year period ending in April 2022 and this review is now well overdue. The DBT is likely to fulfil its obligation to review the pay gap regulations as part of this wider review of non-financial reporting.
Revisions to the Corporate Governance Code
Separately, the Financial Reporting Council (FRC) is now consulting on revisions to the UK Corporate Governance Code, following its stated intention to do so this year and its stated desire to incorporate broader ESG themes. The code applies to listed companies but is influential to other companies’ governance frameworks too. Some notable changes proposed are considered below:
Diversity and inclusion. There is a new reference to the annual report describing social matters that have been taken into account in the delivery of strategy. This new reference will further plant the workforce at the centre of strategic business decisions around opportunity, risk and sustainability.
The proposed updates to the code include a new reference to the board reporting on “how effectively…desired culture has been embedded”. This puts a greater onus on the board to monitor and measure cultural issues around the workforce. Culture covers a broad range of areas including D&I, a positive approach to wellbeing and a culture that facilitates whistleblowing concerns being raised.
The updated code would also require the board to routinely review the effectiveness of arrangements that are in place allowing the workforce to raise concerns. This focus on ‘effectiveness’ will deepen the existing need to review whistleblowing and grievance procedures and require greater board accountability.
D&I references are bolstered with a significant new reference to board appointments promoting equal opportunity, and diversity and inclusion of protected characteristics and non-protected characteristics including cognitive and personal strengths. This new wording replaces previous wording that made reference only to diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
The FCA said the new wording is intended to “give equal weight to all protected and non-protected characteristics, to encourage companies to consider diversity beyond gender and ethnicity”. This is very wide, and companies might need to re-evaluate the weight given internally to various D&I focuses or identify where gaps exist, even where employment law does not offer protection to certain groups.
Executive remuneration. The executive remuneration section of the code has also been heavily revised, meaning companies will need to consider how these changes might impact reward packages. Notably, the code says remuneration outcomes should be clearly aligned to the successful delivery of the company’s long-term strategy, including ESG objectives.
There is a renewed focus on malus and clawback provisions in respect of variable pay, with a requirement to set out the minimum period for such provisions and why that period was considered suitable for the company, as well as the minimum circumstances in which they would be operated. Companies would also be required to report on how—if at all—these provisions have been used in the previous five years.
New guidance will accompany the updated code and the FRC has stated that it expects the revised code will apply to accounting years commencing on or after 1 January 2025 to allow sufficient time for implementation.