The ESG phenomenon is only going to intensify

What initially began as a focus on governance through rising compliance standards, ESG has metamorphosed into a key market driver which informs the strategy of many private and public sector organisations. Its growth is being led by employees, consumers and shareholders, who are increasingly looking for companies and organisations to demonstrate a clear, proactive commitment towards positive environmental and social goals.

The rising awareness of its important role across organisational culture led to last year’s launch of the CMS Scotland ESG Team. It draws on the depth of the firm’s resources and experience across Scotland, the rest of the UK and worldwide. We were also delighted to welcome business leaders from across Scotland at an event exploring how the adoption of ESG practices can deliver real benefits.

We looked at the recent raft of legislation in the UK promoting ESG, including rules introduced in 2017 requiring large employers to report annually on their gender pay gap. While these only apply to companies and organisations employing 250 or more staff, this has given smaller entities an opportunity to position themselves as committed employers with a positive work culture. Some businesses and organisations are going further than current legislation demands by gauging and reporting pay gaps in other demographics, including ethnicity and disability, and implementing strategies to address these.

We also discussed how this evolving trend can help rather than hinder employers at a time when they face major economic challenges. As well as helping position a business or organisation as a great place to work, a commitment tos ESG practices can also safeguard employers from reputational damage, which often comes with a large financial cost.

The recent flurry of Section 23 agreements, where several high street brands have been signed up to contracts with the Equality and Human Rights Commission to address sexual harassment of their workers, is an example of how employers can be adversely affected for not embracing ESG policies. Companies which focus on getting it right from the very start are far better-placed to avoid such ignominy and the associated financial impact which can follow.

Our event also looked where pressure for change was coming from, with a sense that regulation and legislation was lagging behind the progress being demanded within the ESG world. This has created a vacuum which investors are trying to fill by insisting on clauses in contracts aimed at driving change and reducing risk. Ensuring such clauses include robust data and measurement mechanisms is imperative to avoid potential legal disputes.

Helping organisations adopt ESG measures that meet the challenges of the future is our clear focus going forward. We need to look at ways of creating more channels of adaptation finance. This will require greater collaboration between the public and private sectors to help scale-up the ESG process and de-risk investment to make it more viable.

With increasing public awareness of social and environmental issues, the ESG phenomenon is only going to intensify. At a time of changing, uncertain political priorities, it is even more important for employers to play a leading role in driving forward progress.

Dr Amanda Cooke is a Senior Associate and member of the Scotland ESG Team, CMS