Finding the ‘S’ in ESG: Boardroom and Employee Considerations | Skadden, Arps,

Investors have historically overlooked social factors amid a focus on the environmental and governance counterparts as they assess the merit of an investment. This may have been due in part to the difficulty in quantifying social concerns as drivers of shareholder return as well as a lack of available data. However, recent trends demonstrate that the “S” in environmental, social and governance factors (ESG) is now an equally important consideration for companies and their shareholders.

In this article, we look at ESG matters in the employment context. An increased focus on social factors — such as diversity, working conditions and worker voice — has meant that quantifiability is no longer seen as a barrier for action and that those areas are, as a result, the focus of renewed review for many companies. We also look at the impact of ESG concerns on the relationship between companies and executives, which has gained attention in recent months. For example, in September 2020, the chief executive of Rio Tinto stepped down in response to investor backlash over the destruction of a 46,000-year-old Aboriginal site in Western Australia, and in the same month, BHP announced that it would link at least 10% of its executive compensation to environmental targets. These decisions demonstrate that social and employment considerations have a role to play in determining executive pay, managing public outrage and reducing a company’s vulnerability to shareholder activism.

Working Conditions

Recent events have led to an increased focus on workplace conditions from the public and investors alike. The COVID-19 pandemic has highlighted the importance of safety in the workplace while the recent Sunday Times investigation into Boohoo also provided an important reminder to companies of their obligations under the Modern Slavery Act 2015 (MSA). In light of this increased focus, employers would be wise to reconsider their duties and obligations with regard to the workplace and workers in their supply chains.

The MSA places an express obligation (the reporting requirement) on companies with an annual turnover of more than £36 million and that do business in the U.K. to:

(i) report annually on the steps taken to ensure that modern slavery¹ is not taking place in their organization or supply chains; or

(ii) confirm that no such steps have been taken.

The Boohoo investigation involved two main allegations: first, that factory workers in the U.K. supply chain were paid as little as £3.50 an hour, far below the U.K. minimum wage; and second, that workers were required to work throughout the COVID-19 lockdown with little or no social distancing measures or protective equipment in place. The scandal not only highlighted duties under the MSA but also how consideration for workplace conditions has increased in importance in light of the pandemic.

Upon the news of the allegations, Standard Life Aberdeen (SLA), one of Boohoo’s biggest shareholders, did not hesitate to sell almost its entire shareholding. SLA has several funds that aim to invest responsibly and they deemed the response of Boohoo’s management team to the allegations to be inadequate, even though the company distanced itself from the supplier almost immediately.

Boohoo had not necessarily breached the MSA since there is no legal obligation under the MSA to ensure that modern slavery is not taking place (although practices that potentially qualify as modern slavery may entail other breaches of law). However, the MSA’s reporting requirement aims to make companies consider working conditions in their supply chain and risk reputational damage if they do not, and Boohoo’s case is a clear example.

Businesses should conduct thorough risk assessments to avoid becoming another public example. The pandemic has altered the way many businesses operate, with new health and safety requirements and risk assessments for the workplace in light of COVID-19 (see our May 13,…