Back to Basics, Sustainability

Back to Basics: The Fundamentals of ESG

Back to Basics is a weekly feature that highlights important but possibly overlooked information that any EHS professional should know. This week, we examine the definition, history, and workplace implementation of ESG, and how it can lead to a more sustainable workplace.

The modern workplace is changing because of many different factors, including the COVID-19 pandemic, the Great Resignation, and younger generations entering the workforce. Employees are demanding more from companies, in terms of what the company can do for them, and within a broader social context. To deal with this shift in values, employers are turning to metrics such as environmental, social, and governance (ESG) impact to create a more sustainable workplace for everyone. Lawyer Adele Abrams and senior risk control consultant Abby Ferri discussed ESG in a recent webinar to provide more context behind the idea, and how employers should be implementing it at their companies.

Definition

ESG as a concept is an evaluation of an organization’s collective consciousness for social and environmental factors. More specifically, it is a metric to assess an organization’s impact beyond its internal mission-driven operations and financial performance. In 2021, the U.S. Securities and Exchange Commission (SEC) provided an overview describing a range of factors that ESG can encompass from an investor’s perspective:

  • Environmental: a company’s impact on the environment, the risks and opportunities associated with climate change, and its impact on an organization’s business and industry.
  • Social: an organization’s relationship with people and society, in terms of diversity, equity, and inclusion (DEI), safety and health, human rights, and community investment.
  • Governance: the way that a company is run, in terms of its transparency and reporting, ethics, compliance, shareholder rights, composition, and the role of the board.

The theory is that the companies that align with ESG values, including both for-profit and non-profit organizations, are likely to outperform in their respective markets, according to Abrams and Ferri. In fact, the United Nations (UN) has published 17 Sustainable Development Goals that cover ESG and will have an impact on multinational employers.

History and legal context

In 2016, the Occupational Safety and Health Administration (OSHA) released a publication on sustainability that read, “Employers are only sustainable when they ensure the safety, health, and welfare of their employees.” This was inspired by a UN Commission report from 1987, which stated that “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

According to Abrams, there are those who say that ESG is the “new Sarbanes-Oxley” when it comes to impact on risk-based internal audits for EHS and other organizational or regulatory areas. The Sarbanes-Oxley Act of 2002 includes provisions for corporate and auditing accountability, responsibility, and whistleblower protections, which are enforced by OSHA.

There is currently no concrete legislation requiring ESG reporting, but institutional investors are calling for clear regulatory guidance or rules for sustainability disclosures. Right now, the issue is figuring out what information is relevant to the investment decision. Reporting could include an organization’s performance on climate change, DEI efforts, political spending, supply chain management, community support, and human capital management.

Currently, ESG reporting is voluntary, other than PAC contributions, Equal Employment Opportunity Commission (EEOC) requirements for federal contractors, and SEC reporting of some Mine Safety and Health Administration (MSHA) citations for publicly traded mining companies. However, the SEC is moving towards issuing new rules requiring disclosure of ESG activities with a focus on more transparency. After the Sarbanes-Oxley Act, many companies went ahead and formed disclosure committees to cover information required by the SEC. Abrams and Ferri said that these committees could expand to include ESG reporting and audits, or subcommittees could be used for non-reportable information.

Application in EHS

Environmental, health, and safety (EHS) professionals need to understand ESG and the role that they play in its workplace implementation. Employers have a responsibility to attract and retain young talent through sound safety practices and results, because workers will ultimately migrate towards companies that treat them better. There is another metric called employee value proposition (EVP) that reflects purpose over profit, which is something that younger employees especially are seeking out at companies.

In terms of the environmental component of ESG, there exists both a direct and indirect relationship between the work of EHS professionals and corporate ESG goals, according to Abrams and Ferri. The direct relation includes the concrete environmental impact that their work has, along with the risks and opportunities related to climate change. The indirect relation involves items such as PPE and gear procurement, wildfire and waste resources, and fleet management, for example.

In the social component, EHS professionals have a direct impact on employee health and safety, including human rights, DEI, total worker health, and the use of technology and innovation. Indirectly, they impact stakeholders and the supply chain, meaning safety management systems and subcontractor management, and clients, investors, and communities. 

Lastly, in the governance component, EHS professionals must have a commitment to the rule of the law. This means remaining in compliance with rules from OSHA, the EPA, ISO, DOT, and other organizations that provide EHS guidance. They must also value ethics along with compliance, because as mentioned previously, younger generations are looking for that alignment of their job and personal values.

Additionally, EHS professionals also need to consider insurance policies, coverage, and liability. Many organizations have risk management personnel specifically for this purpose, but at others, this falls under the EHS professional’s sphere of influence. Ferri and Abrams emphasized that EHS is an investment, not just a cost, and that sentiment will help drive ESG values forward in the workplace.