Is health the missing piece in ESG?

Our Health and Wellbeing coordinator, Xanthe Grace explains why she thinks it’s essential that Health is a natural ally to the social element in ESG.

ESG investing has gained huge momentum in recent years, with socially responsible investors using its criteria to screen potential investment opportunities. The key features are used when measuring the sustainability and ethical impact of an investment, based on the philosophy that environmental, social and governance components can have an impact on company success and market returns.

Investors may consider a number of different ESG metrics when looking to adopt a strategy and these factors typically include industry-specific issues such as carbon footprint, climate change, labour management, corporate governance, privacy and political views, amongst others.

Many businesses are starting to get to grips with their environmental actions as the impact is relatively easy to measure. Carbon emissions, deforestation, waste management, and water usage are all tangible factors lending themselves to quantitative assessment.

Governance matters can also be held to account by quantifying executive pay, representation of diverse board members and political and charitable contributions.

By comparison, the social component consists of much more qualitative factors, such as data security, customer satisfaction, human rights, and fair labour practices. Because these more amorphous factors are harder to measure, the “S” factor is always prone to falling out of ESG considerations.

For this reason, it is all the more important to emphasise social factors that are measurable, such as health and wellbeing, but whilst health might be implicitly part of Social, it is not explicitly stated.

Therefore, there is an urgent and strong case for attaching an “H” for “Health” and broadening the mandate to ESHG, placing an equal emphasis on ensuring human capital flourishes, as well as financial capital.

Firstly, if a company has robust health and wellbeing policies in place, it can have a positive impact on financial returns. A study from the London Business School suggests that companies with high levels of wellbeing outperform the stock market by two to three per cent per year and research from Business in the Community shows that FTSE 100 companies demonstrating best practice in employee health and wellbeing show a 61 per cent return rather than the average 51 per cent. According to the US SIF Foundation, assets under management using ESG strategies grew 42 per cent between 2018 and 2022.

However, much more needs to be done, as it is widely acknowledged that health inequalities have been increasing for several decades in the UK. This is exacerbated for those who live in poor quality housing, polluted areas with limited access to healthy food, higher obesity rates and little say over working conditions. Poor health is increasingly straining public finances and there are inevitable costs for businesses. In the UK, 70 million working days are lost each year due to mental health problems and this number is increasing.

Asset managers now have a wide range of strategies to quantify climate change and the same approach could be used to measure employee health and wellbeing such as changes in staff turnover, absenteeism, and productivity. Using these measures, fund managers could highlight companies that prioritise the health and wellbeing of their staff.

Traditionally, organisations have viewed wellbeing as a nice to have rather than a necessity. It wasn’t considered an employer’s responsibility, just something managed by employees. However, in light of the global pandemic, expectations have shifted and organisational leadership has become accountable for proactive wellbeing promotion and interventions.

The fact is that employee mental health and wellbeing is now shifting up the priority ladder as investors are seeking to ensure they invest in companies who have demonstrated that they are committed to nurturing staff health and wellbeing. Effective corporate initiatives on emotional wellness are now valued by shareholders, as well as other stakeholders, who are recognising how these issues affect personal and professional lives.

The benefits to companies that have a caring culture towards their staff include fewer staff absences and greater productivity, and when staff feel engaged and appreciated, the whole ethos of the organisation exudes positivity. It also helps with staff recruitment and retention, as when people feel valued and there is autonomy within their role, they want to stay in a workplace. This enhances a company’s ability to generate long-term sustainable values as it demonstrates that they prioritise employees, a factor which is becoming even more important in the digital age.

Good health is good for business, likewise poor health is poor for business. A clearer commitment to investing in a healthier society should be one of the pandemic’s legacies and therefore it should be enshrined within ESHG.

ESG

– Considerations for employers

Why should ESG be important to employers? For starters, a focus on the “S” (social aspect) of ESG includes matters such as diversity, equity and inclusion, employee wellbeing (with a focus on mental and physical health and flexible working) and employee engagement, all of which will have a positive impact on the health and wellbeing of staff.

Secondly, there is now an expectation from employees that employers go beyond merely having internal policies that comply with legislative and regulatory requirements, with many wanting to work for a company that reflects their own ethics. While ESG does not change employer’s obligations to staff under existing employment law, an increased focus on improving their ESG credentials means that employers are looking at ways of implementing and embedding meaningful cultural change within their organisations in order to attract and retain quality staff.

To succeed with their ESG strategy, employers should proactively seek employee buy-in to their ESG initiatives. Employee input should be sought on how ESG can be embedded within an organisation’s culture, and positive recognition for feedback provided to encourage engagement.

An ESG strategy should be reflected in the employee handbook and company policies to help foster the desired cultural changes. It’s important to regularly review employee handbooks, not only to check that their compliant with current employment legislation, but also to ensure that they remain in line with an employer’s ESG values. Edward O’Brien Edward.OBrien@LA-Law.com 01202 786148 Edward O’Brien is an Associate in Lester Aldridge’s Employment & HR team. The pressure on businesses has been rising for several months now, with supply chain issues, rapidly rising inflation and, especially, the shock of soaring energy prices caused by the war in Ukraine. The latest Bank of England forecast on 4 August for a full-blown recession came with a significant rise in interest rates to 1.75%. This will put significant pressure on very many businesses, especially SMEs, who are already struggling to recover post-pandemic

There are 5.5 million small businesses in the UK It is often the big companies and corporations that take the headlines when it comes to declining sales and profits and job losses during recessionary times. However, as the Federation of Small Businesses reports (www.fsb.org.uk/uk-small-businessstatistics) there are 5.5 small businesses in the UK (with 1-49 employees), and they account for nearly 50 per cent (12.9 million) of total employment and 36 per cent (£1.6trillion) of private sector turnover.

Elaine Wilkins, business development manager at Antony Batty said: “These are big numbers and these companies are the backbone of the UK economy, but they are very often the most vulnerable to the pressures now being seen in the UK economy.” There are three categories of warning signs: • Underperformance. Early signs include a lower-than-expected bank balance and surprising use of an overdraft facility or lower profit margins. These issues can be managed for a short time, however, if, for example, inflation forces up costs, swift and decisive action might be needed to maintain margins longer term.

Businesses with lots of debt need to watch interest rates closely.

It only takes a relatively small and sustained rise in interest rates for debts to become much harder to service.

When underperformance is spotted, tough questions need to be asked and early action taken. Often, the solution is not simple and getting support and advice is better than waiting and hoping for things to get better. Financial distress. As the Insolvency Service’s recent figures have shown (where the number of company insolvencies in Q2 2022 was 13 per cent higher than in Q1 2022 and 81 per cent higher than in Q2 2021), businesses can move very quickly from underperformance to crisis. 6 key signs of financial distress are:

• On-going cash flow problems • High interest payments • Defaulting on bills • Extended creditor or debtor days • Falling margins • Increasing stress levels The sooner help and advice is sought from an insolvency practitioner, the more that can be done to turn things around. If a business is already defaulting on an HMRC Time to Pay agreement or cannot pay the wage bill or meet the growing demands of other creditors, it might be difficult for the insolvency practitioner to avoid a formal insolvency process.

Some of the key things to turn a business around are: getting tighter cost controls in place; implementing more effective credit control; agreeing new payment terms with creditors; stripping out unprofitable product lines and, longer term, working to change a company’s culture and working processes. • Crisis. If financial distress develops into a full-blown crisis, then it is likely that a formal insolvency procedure is required. If parts of a business can be saved, then an administration might be appropriate. Likewise, if a company is able to enter into a formal arrangement to repay some or all of its debts over a fixed time scale, then a Company Voluntary

Arrangement is possible. If neither of those two procedures are possible, then liquidation is the only remaining option. www.antonybatty.com

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