In addition to making moves to improve corporate social responsibility, an increasing number of businesses are addressing the challenges posed by climate change. According to PwC’s 27th Annual Global CEO Survey, published earlier this year, 47% of respondents reported that their companies had implemented measures to protect their workforce and physical property from climate risks—up from 17% in the previous year.
But industry analyst Brian Sommer says that CEOs aren’t the only business leaders immersed in this effort. CHROs are also essential to this work. In a keynote for Human Resource Executive‘s HR Technology Conference Online this week, Sommer delved into the complex interplay between environmental, social and governance (ESG) issues and the human resource practice.
Sommer, known for his extensive work in the industry and his recent book The Executive’s ESG Playbook, provided a comprehensive overview of how ESG mandates reshape corporate responsibilities, particularly within HR functions.
ESG reporting is more regulated than ever
Sommer dug into the increasing importance of ESG reporting, which has gained significant traction following new regulatory requirements from bodies like the U.S. Securities and Exchange Commission (SEC) and similar regulatory groups around the world.
Earlier this year, the SEC adopted new climate disclosure rules requiring companies to publish information on climate-related risks that could materially impact their business or financial statements. According to PWC, terms align with existing regulations, such as Europe’s Corporate Sustainability Reporting Directive (CSRD) and California’s disclosure requirements.
Modern reporting, according to the analyst, is highly regulated and prescribed. “The days of doing selective ESG reporting are rapidly coming to an end,” said Sommer. It’s unacceptable for businesses to reveal only choice elements of their efforts (particularly the “glowingly positive,” according to Sommer).
Sommer noted that while many companies have previously concentrated mainly on the environmental aspect of ESG, the social and governance components are equally crucial and complex. “A lot of very major companies have found out that some supplier down in their supply chain is doing something that they really don’t want to have happen,” he said.
Sommer says that organizations must diligently track relationships with their suppliers and their suppliers’ employees throughout the entire value chain. Monitoring responsibilities include documenting diversity, fair wages and labor practices—and HR departments have a significant role in this process. Key concerns include avoiding interactions with restricted entities, verifying that suppliers pay livable wages and ensuring no forced labor is involved. This puts an incredible amount of onus on businesses that don’t enjoy high levels of visibility into their web of partners, vendors and other suppliers.
HR’s role in ESG initiatives
Because ESG layers are far-reaching, companies bear the burden of measuring and communicating their efforts in all three categories: environmental, social and governance. Sommer emphasized that human resources leaders are key in this execution. “HR is going to care a lot about the social side and the governance side,” he said. “And you’d be surprised how many chief HR officers are very, very involved in this kind of effort.”
HR’s responsibilities include ensuring fair labor practices, promoting diversity and inclusion and maintaining ethical supplier relationships, where applicable. Sommer pointed out that among leaders included in Gallup’s CHRO Roundtable, only 4% play no part in ESG reporting. Thirty-four percent are accountable for the social component alone, and 53% partner with the sustainability or corporate social responsibility committee.
“And that’s pretty interesting because it shows just how much involvement the chief HR officer has in ESG work already,” said Sommer. He also referenced research by Marsh & McLennan Advantage, demonstrating the importance of communicating the brand’s ESG efforts in improving a company’s recruiting competitiveness.
HR tech-related challenges
Sommer pointed out that ESG goals can’t be delivered by any one person within an organization. “So, while today’s conversation is mostly focused around the chief HR officer and the function of HR, it is something that crosses pretty much every dimension in the firm,” said the analyst. Yet, one of the major challenges is the integration of applicable data across diverse, disparate and often outdated corporate systems.
Standardizing data definitions across global operations often means dealing with varying units of measure for power and energy consumption and differing definitions of work weeks, discrimination and diversity, equity and inclusion across regions, said Sommer. These discrepancies necessitate rationalizing variable data to create a unified report, which often leads companies to rely on basic tools like spreadsheets or paper for initial reporting efforts.
“It’s going to be tough for you to have all this in a paper or spreadsheet format and to have to respond and defend these numbers before external auditors and other third parties,” said Sommer. He warned that most existing HR and enterprise resource planning (ERP) systems were never set up to capture this depth of data, particularly on a global basis. The analyst stressed the need for advanced tools and systems to manage and report this data accurately.
Sommer suggested that companies must develop robust plans to collect and integrate ESG data, involving teams across various disciplines. He highlighted the importance of having a plan to tap into real-time metrics that provide visibility into the company’s operations on a daily or monthly basis (as compared to yearly, as was once more standard).
This approach contrasts with outdated systems that have historically impeded HR’s ability to meet ESG reporting goals, said the expert. “I think we’ve all seen this movie before, where systems used to be batched and data was at least a month or more old, and it wasn’t very actionable,” said Sommer. “Companies really put the pressure on vendors and themselves to develop real-time systems.”
He added that board members and executive committees now want predictive and forward-looking data to help run their businesses, making even real-time metrics seem sluggish. “We’re going to see that same pressure on ESG data,” said Sommer.
An ESG strategy for the long-term
Reflecting on the future, Sommer envisioned a scenario where ESG data not only meets regulatory requirements but also drives strategic decision-making. He proposed that HR should aim to add “years to life and life to years” for employees, enhancing their wellbeing and career value, and extending this ethos to all individuals associated with the company, including contractors and suppliers.
Sommer posed a question to the audience asking, “Does your firm offer employees a job, or does it give them a career?” He said if most people just have a job, the core function of a human capital team is to create the kind of environment that causes people to want to stay years longer than they otherwise would have. “If you’re not, well, I think there’s a problem there,” said Sommer.
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