HR-ESG is attractive: Environmental, Social and Governance (ESG) aspects are becoming more important for companies who need additional capital, for those who want to increase sales, and also for hiring and keeping good employees (HR for “human resources”)[1].
In addition, employees can help companies to become more sustainable[2]. The Boston Consulting Group, for example, published recently that new ideas generated by employees helped to “overcome roadblocks in reducing Scope 3 emissions”[3].
Little scientific HR-ESG and employee engagement research
Unfortunately, I find very little comprehensive scientific research on HR-ESG[4]. A study by Hoa Briscoe-Tran from the University of Alberta[5] is one of the rare exceptions. Briscoe-Tran writes: “I analyze 10.4 million anonymous employee reviews and find that employees have useful information about firms’ environmental, social, and governance (ESG) practices. Employees discuss ESG topics in 43% of reviews, thereby providing substantial information about firms’ ESG practices. The employees’ inside view predicts various indicators of a firm’s future ESG-related outcomes, beyond the existing ESG ratings, particularly on the S and G dimensions. Using the inside view, I show that a firm’s stated ESG policies often differ from its employees’ view of its practices. … ESG rating agencies could consider incorporating employee reviews into their rating methodology more broadly” (p. 33).
Companies should use the broad employee interest for ESG in a systematic way. And Shareholders should address this change potential when they engage with their portfolio companies.
Even though I have studied scientific publications regarding shareholder engagement quite thoroughly[6], I have found very little engagement with a broad HR-ESG perspective going significantly beyond rather limited diversity, equality, and inclusion (DEI) issues.
Broad HR-ESG activation is easy
With my mutual fund I try to invest in 30 of the most sustainable companies worldwide. Most of these companies actively address the typical HR-ESG-topics such as DEI, workplace safety etc.. I read their sustainability reports and also directly asked them, but I could not find one single company which tries to broadly engage its employees regarding ESG topics[7].
In my shareholder engagement strategy[8] I propose a very simple and efficient approach to activate employees for ESG-issues. Specifically, I write to all my portfolio companies:
“I think that regular and broad questions such as “How satisfied are you with the environmental, social and corporate governance activities of your company?” and “Which environmental, social and corporate governance improvements do you suggest to your company?” plus the (anonymous) publication of the main results of the answers in the sustainability report would be very helpful in seriously engaging employees and getting valuable structured feedback”.
Leveraged shareholder or stakeholder engagement
Most of these companies use regular broad as well as specific pulse employee surveys and typically have high participation rates. Implementation of my questions therefore should be simple and cost-efficient.
In addition, I suggest asking the same questions to customers and they also could be asked to suppliers. Interestingly, “surveys are already very common among employees, but many companies do not yet use them for customers (or at least, they don’t report on it if they do) and surveys of suppliers may be worth adopting as well“[9]. Therefore, the implementation of my suggested regular ESG surveys of customers and suppliers might be somewhat more time-consuming and expensive than employee surveys. But I think that it may well be worth the effort.
If companies regularly ask these questions to employees, customers and suppliers, shareholders can leverage their engagement activities to several stakeholder groups.
I started my respective engagement activities only at the end of 2022. Some companies answered that they like my suggestions and plan to analyze them, but I cannot report implementations so far.
I am only a small investors and cooperative engagement can me more powerful. Unfortunately, my trials for cooperative engagement with other investors have not been fruitful yet. One reason is that I could only find very few sustainable investment funds with a dedicated small-and midcap focus such as mine. With the few such funds I have typically very little overlap. The asset managers and shareholder organizations which I have asked so far want to cooperate with larger asset managers and not with such as small entity as mine.
But I will continue to ask for such surveys and the publication of their results. I am confident, that at least a few companies will adopt such surveys and position themselves even more as ESG-leaders[10]. And, maybe, with publications such as this one, I can encourage other companies, investors etc. to support such broad and easy to implement HR-ESG activities as well.
[1] see Effect of Corporate Environment Social and Governance Reputation on Employee Turnover by Ming Leung, Chuchu Liang, Ben Lourie and Chenqi Zhu as of August 20th, 2023
[2] see Engaging your people as the advocates and enablers of ESG change by Jessica Norton and Hannah Summers from Willis Towers Watson as of July 13, 2020
[3] see People Make the Difference in Green Transformations by Alice Bolton, Marjolein Cuellar, Kristy Ellmer, Elina Ibounig, Camila Noldin, Nick South and Astrid Vikström from The Boston Consulting Group as of August 23rd, 2023
[4] For a broad overview see e.g. Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022
[5] Do Employees Have Useful Information About Firms’ ESG Practices? by Hoa Briscoe-Tran – SSRN as of Aug. 2nd, 2023
[6] see for example Stakeholder engagement and ESG (Special Edition Researchposting 115) by Dirk Soehnholz as of Feb. 3, 23
[7] compare Active or impact investing? By Dirk Soehnholz as of July 21st, 2023 and 230831_FutureVest_Engagementreport-2830ab605a502648339b4f8f58fa2ee2dce539ef.pdf
[8] see Shareholder engagement: 21 science based theses and an action plan by Dirk Soehnholz as of Feb. 8th, 2023
[9] see Stakeholder Engagement by Brett McDonnell – SSRN as of Oct. 31st, 2022, p. 48
[10] this study is one of the reasons for optimism on my part: A Test of Stakeholder Governance by Stavros Gadinis and Amelia Miazad as of Aug. 25th, 2021