ESG: Strengthening governance through better workforce reporting

In the final part of our ESG series looking at employment law and ESG, we consider what employers can do to strengthen their workforce reporting as part of good governance.

Workforce reporting means publishing data on an organisation’s employees and employment practices, often as part of a corporate report. High quality workforce reporting can be a valuable tool, providing a relatively low-cost way of “selling” your organisation to both investors and prospective candidates. However, research published in March 2022 by the CIPD How do companies report on their ‘most important asset’? (the “CIPD Report”) highlighted that the quality of reporting on workforce issues in the UK is low and examples of good reporting practice are rare.

One of the challenges with workforce reporting is knowing what to report and how to do that in a credible way. There is a detailed list of mandatory climate-related financial disclosures for (in scope) companies in the UK, but the same level of detail is missing for workforce reporting. As a result, most workforce reporting in the UK is voluntary, and topics reported on may depend on what questions are asked and responses collated as part of signing up to an ESG standard or external accreditation scheme. To help shift the dial here, in December 2022, RailPen, the High Pay Centre, the CIPD, the PLSA and Board Intelligence, launched a further report, Worthwhile Workforce Reporting (“WWR”) to help guide employers on good practice in the area.

In this update, we draw out key areas of focus for those organisations looking to expand their offering in terms of workforce reporting and stand out from the crowd.

Corporate governance and workforce reporting

As a starting point, it is important to remember that there are reporting requirements relating to workforce data within various corporate governance rules.  Depending on size and scope, companies may be required to follow the workforce engagement provisions in the UK Corporate Governance Code, comply with s.172 obligations in the Companies Act in relation to their Strategic Report, produce an annual modern slavery statement or comply with other regulations such as those on gender pay gap reporting. It is not always straightforward to determine which of the various rules apply, particularly as some of the obligations overlap. We would recommend that each organisation takes legal advice to ensure that, as a minimum, the various layers of compliance with corporate governance and diversity disclosure requirements are being met. 

Another area of overlap is corporate governance and ESG disclosures. The Financial Reporting Council (“the FRC”), the body that sets the UK’s Corporate Governance Code, has been working on several initiatives to “drive best practice in high-quality and comparable ESG reporting and disclosure.” In January 2023 the FRC updated its Statement of Intent on ESG signalling that transparency on ESG risks is a key priority.

HR and workforce reporting

The next step is to consider how the quality of the reporting can exceed statutory minimum requirements to add real value to those reading the reports and demonstrate a commitment towards the Social aspect of ESG. HR teams can be instrumental here, both in terms of having access to key data on the programs, support and benefits provided to employees and in terms of being able to recognise the value of good quality workforce reporting and promote this internally. This can be particularly important where the data is not necessarily telling the story that the company would like.

Recommended steps to improving the quality of information published will vary depending on size, resources and corporate values. There is no one size fits all solution here. By way of guidance though, the WWR includes helpful case studies of effective reporting and also sets out eight key principles. It suggests that good workforce reporting should:

1. Be linked to a company’s strategy and performance
2. Include an appropriate mix of data and narrative
3. Be balanced and self-critical
4. Focus on targets
5. Use consistent data points over time
6. Include both directly employed and contingent workers
7. Be disaggregated (where appropriate)
8. Have received some kind of external independent assurance

These principles can be applied across the people related areas the company decides to report on. Below we have suggested key people areas falling under 4 headings to focus on if your organisation is looking to expand and develop the people issues it reports on: fair working, diversity, wellbeing and modern slavery.

Fair working practices

Fair remuneration and benefits:  Employers may choose to report on whether they pay the real living wage or provide details of the level of pension benefits, medical cover or other benefits provided to support employees beyond the statutory minimum. Companies often focus on Executive Remuneration and certain companies are obliged to produce pay ratio information, but it is worth going further than this. Employees are obviously interested in the pay and reward structure, and investors want to know that employees receive fair pay.

Workforce engagement with employees and trade unions: This may include details around the collective structures or outlining pulse surveys and information campaigns that have been carried out, as well as the feedback mechanisms in place. Workforce engagement is a key aspect of the UK Corporate Governance Code, which contains three different ways companies can engage with their workers. These include appointing a director from the workforce, establishing a formal workforce advisory panel, and appointing a non-executive director whose focus is workforce engagement.

Whole workforce engagement: Consider extending the scope of who your organisation reports about. The CIPD Report noted that there was a real lack of reporting covering, what they describe as, “contingent workers” and atypical working arrangements such as outsourced employees and too much focus on employees. Including more comprehensive information can be a real differentiator.

Health and safety: Accident and injury rates will give an indication of how seriously a company take this issue and how they value their employees. This is a crucial aspect of company information, particularly for those companies who operate in a safety critical or high-risk environment.

Employee development, skills development and training: This is an area where we are starting to see employers outline how they support and develop their staff, but it is more powerful if backed up by data, such as hours of training (CIPD report only 35% of companies doing so) or cost of training (CIPD report only 16% of companies doing so). As the WWR makes clear investment in training is essential in retaining a motivated workforce.

Speaking up against wrongdoing: Some companies publish how many whistleblowing complaints they receive. The steps taken to create a speak up culture is particularly relevant for those companies operating in the financial services sector, where a whistleblowing policy and a whistleblowing champion is a regulatory requirement. However, other organisations who are looking to emphasise their open and inclusive culture should also consider reporting on this.

The future of work: This is another area where employers are publicly explaining their approach to hybrid working and how they see work evolving.  According to a recent study by PWC, 77% of employees want hybrid working with a mix between the office and home.

Diversity and inclusion

We covered the benefits of pay gap reporting in ESG: Pay Gap Reporting – a tangible way to show progress under the S. Other D&I issues to report on include:

Setting gender or ethnicity targets at managerial or board level: It is becoming more common to report diversity targets publicly. For example, the reporting of such targets was included in the new FCA rules on diversity and inclusion. (For more information read our Law-Now). Organisations are far more likely to take action to improve diversity if they, first of all, gather the data and identify that certain groups are underrepresented and, secondly, make a public commitment via a target to redress this.

Employee diversity networks: Detailing what networks exist, and what they have achieved is a good way for an organisation to explain how embedded diversity and inclusion is within their business, and an opportunity to highlight the steps that have been taken at grass roots level. 

Family friendly or supportive policies: If the organisation has introduced new policies to support employees, for example around the menopause or domestic violence, then this could be mentioned. Policies which support employees to maintain a healthy work life balance are seen as fostering a healthy workforce. As the WWR explains, generous parental leave policies form a key part of what attracts an employee to work for a particular employer.

Training on tackling discrimination and harassment: If the organisation has run discrimination or harassment training to staff or updated policies which affect these matters, then these issues could all be referenced in this section. Some employers are transparent about how many bullying and harassment complaints they receive on an annual basis. Organisations increasingly recognise that regular equality training serves many functions. Not only does it minimise legal risk, it assists in promoting a shared understanding of different cultures and groups and improving inclusion.

Composition of workforce: Setting out the diversity composition of the workforce according to race, sex and disability is another option, noting that the ability to capture accurate data may be limited. Certain companies must publish employee diversity information to comply with corporate governance requirements in the Companies Acts. For others, the voluntary framework in place to encourage employers to report on disability is a useful reference point, for example.

Wellbeing and employee satisfaction

Employee satisfaction/opinion surveys: Year on year comparisons and industry benchmarks can provide a useful level of comparator information. These have tended to be the most used metric in the people pages in annual reports because they provide a strong indication of culture within an organisation.

Turnover rate: Employers could report why employees chose to leave. One company in the WWR provided the percentage of leavers who cited work-life balance as the reason for leaving. Publishing this type of data provides a high-level snapshot of employee satisfaction. A particularly high turnover rate may indicate a problem with culture and management that investors would want to know about.

Absence rates: Investors will want to know if absence is affecting productivity and what steps an employer is taking to support employees and reduce absence. This information gives some insight into the health of the workforce, particularly if there are high levels of workplace stress.

Taking care of employees’ physical and mental health: This may include programmes that have been put in place to support people, with online sessions, wellbeing programs or counselling. The pandemic has increased the focus on mental health and increased the anxiety and uncertainty employees have felt. Wellbeing, according to the WWR is a major determinant of how committed workers are to their employer. Poor mental health can also link with culture and governance, in addition to absence rates.

Tackling modern slavery

Mitigating the risk of modern slavery: Any steps taken by the organisation to identify and reduce the risk of modern slavery within the business and/or supply chains are worth emphasising, including for example staff training and speak up policies. Unlike many of the examples in the Law-Now, for certain employers publishing their modern slavery statement is a legal requirement. Workforce reporting on this issue can link in with any modern slavery statement published. This could contain details of applicable codes of conduct, contractual provisions, due diligence and reporting procedures. A key aspect of tackling modern slavery is the supplier dimension with businesses under pressure to explain how they influence their suppliers to behave in an ethical manner.

Final Thoughts

Not every organisation will want or need to report on every point mentioned in this list. However, we are seeing a trend towards increasingly transparent business, building on the concept of workforce engagement, as employers seek to create a more sustainable approach. Reporting on a wider range of workforce issues than has been the norm in the past, backed up with data, is one way of demonstrating commitment to both the S and G in ESG and making that accessible to all key stakeholders. 

If you want to discuss these issues further then please speak to Catriona Aldridge, Sarah Ozanne.