Pay Equity is the Key to Achieving the “S” in ESG

Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) reporting have become vital considerations for employers. But rather than seeing the requirements as an additional reporting burden or a distraction, a focus on the “S” in ESG can have a positive impact on financial performance and brand reputation. 

S in ESG relates to the social aspect of sustainable investment, covering ways in which organizations interact with their employees and the communities within which they operate. ESG initiatives are essential to both financial performance and brand reputation. Here’s why:

• Nearly 50% of investors surveyed considered the social component of ESG the most important when making decisions, compared to the environmental component at 35%. 
• 96% of employees expect their organization to adopt a sustainability agenda but only 28% of HR leaders prioritize sustainability/ESG according to Mercer’s Global Talent Trends 2022/23.  
• Nearly half of employees have left their employer due to “ethical or sustainability concerns.”
• Ethical investment is a growing trend. 85% of investors take ESG factors into consideration when making their investment decisions. At the beginning of 2022 in the US, 13% of total assets ($8.4 trillion) under professional management were sustainable investment assets. PwC reported that ESG-focused institutional investment is “seen soaring 84% to US$33.9 trillion in 2026.” 
• Gartner states that sustainability metrics in investment plans will be standard practice by 2026. 

CSR and ESG reporting provide potential investors and stakeholders with the vital information they need relating to investment decisions, providing wider insight into performance on sustainability issues. That includes progress on diversity and equity within an organization, and critically, pay equity, which is already a priority for employers in 2023. 

The expanding landscape of ESG reporting

With 96% of the G250 already reporting on sustainability, the global ESG regulatory landscape is constantly evolving. 

For instance, on January 5, 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) came into force, replacing the Non-Financial Reporting Directive (NFRD). Pay equity is a key component of the CSRD, which states:

“Under the draft standards, the employer must report the Basic Salary and Remuneration Ratio (or Annual Total Compensation Ratio) between male and female employees.”

The EU’s Pay Transparency Directive complements the requirements of the CSRD Directive. 

Embracing the “S” in ESG

While employers acknowledge their responsibilities under ESG reporting, most are not able to respond effectively. Deloitte’s 2023 Global Human Capital Trends survey found that:

• 84% of organizations recognize that understanding the impact of sustainability and taking responsibility for progress is important to their success
• But only 21% believe they are ready to address issues relating to ESG 

The survey notes that barriers to embracing ESG include organizational culture and resistance to change. Wider cultural resistance was evident during a vote in the House to override President Biden’s first veto of a Republican-led bill. The legislation opposed the consideration of ESG issues in retirement and investment decisions. 

Businesses that fail to embrace CSR and ESG not only put themselves at risk, but they also put their business partners at risk. The SEC’s Climate and ESG Task Force identifies ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment. Several enforcement actions have been issued, including a $55.9 million settlement with Brazilian mining company, Vale SA, related to charges arising from allegedly misleading disclosures prior to a dam collapse. 

ESG reporting is not uniformly compulsory. In November 2021, the IFRS Foundation announced its launch of the International Sustainability Standards Board (ISSB), created to generate global sustainability standards in 140 participating countries. In the US, the SEC requires all public companies to disclose information that may be material to investors.

Regardless of resistance at an organizational or political level, however, it appears that ESG is here to stay as noted by Bank of America Chief Executive Brian Moynihan at the 2023 World Economic Forum. He noted that CEOs view ESG goals such as making their workforce more diverse and combating climate change as integral to the long-term health of their companies.

Pay equity is an essential component of “S” in ESG

Compulsory reporting obligations, such as those seen in the EU, provide businesses with an opportunity to evaluate the pay gap in their company and adopt strategies to drive pay transparency, which in turn can attract more investment and retain talent. 

But how do organizations commit to ESG responsibilities and lead in a way that engenders trust? How can they leverage ESG to differentiate themselves in a competitive marketplace? 

One of the key strategies lies in a public commitment to gender equality, which research suggests is a catalyst for accelerating ESG. 

Adopting a comprehensive pay equity strategy is essential to support this commitment. It makes a clear statement to potential investors, attracts more talent to your organization and motivates employees. Follow these steps:

Carry out a pay equity audit: Investor driven reporting obligations motivate employers to evaluate their pay equity status. A pay equity audit is one of the most effective methods for identifying pay disparities within your organization, as well as identifying their root causes. Trusaic’s PayParity carries out a pay equity audit across your workforce in a single statistical regression analysis delivering a clear picture of pay gaps and risk areas across groups of employees, at every level.

Create a fair compensation strategy: We identify and correct the root causes of pay disparities by utilizing advanced analytics and algorithms that pinpoint biases, faulty systemic processes, and other factors, providing you with pay ranges to create a robust compensation strategy, remain competitive and avoid the creation of future disparities.

Stay up to date with pay equity laws: The benefits of pay equity are undeniable, providing employers with the opportunity to exceed financial targets, attract talent and innovate effectively. To remain competitive, pay equity must be a priority for all employers. Partnering with Trusaic helps your organization to comply with the complex and varied pay transparency laws in the US and globally that affect your employees. 

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Employers looking to tackle ESG goals and get ahead of the pay equity initiative should consider undergoing a comprehensive Equal Pay Risk Assessment.