Many will already be familiar with the term ESG, which stands for Environmental (the energy we use and the consequences of this), Social (the relationships we have with others), and corporate Governance (the controls and practices in place to ensure we comply with requirements). 

When you start to explore what ESG is and how companies are using it, you will see quite a wide variety of applications, but fundamentally it is being used to describe the longer term sustainability of a company’s approach to its people, suppliers, customers and investors. The challenge for many organisations is understanding what it really means for them.

ESG isn’t just something that matters to investors; it impacts all of us. It has been proven that embedding environmental, social and governance factors not only makes good business sense, it creates better outcomes for people.

Governance 
This boils down to organisations having systems in place to check they are doing what they are supposed to be doing. This can be evidenced in the form of the Board committees, or making sure they adhere to regulations and legislation – like complying with minimum wage legislation or gender pay reporting requirements. 

One specific aspect of governance that has come to prominence recently, particularly in regard to responsible reward, is Executive pay. We’ve seen increasing regulation around measures like CEO ratio reporting and strengthening the UK Corporate Governance Code, which aims to ensure listed companies strongly link their strategy and culture with their purpose. In a similar vein, the Wates Principles encourage private organisations to follow governance principles, such as ensuring that they align remuneration with the long-term success of the business. We’ve also seen some changes in the design of incentive plans, with a move away from purely financial targets in the form of ESG metrics aiming to demonstrate a focus on long term sustainability.

However, it’s not as straightforward as pulling a few metrics out the air and expecting a round of applause from investors and stakeholders, or a change in culture. Aligning ESG metrics doesn’t, on its own, create the desired long-term change. Other areas of high-profile governance issues relate to diversity and inclusion, with many institutional shareholders demanding better representation of women and ethnic minorities on corporate boards and in executive ranks. In this instance, simply publishing your gender pay numbers is not enough – to demonstrate true commitment you need to show what progress you are making with your diversity and inclusion ambitions.

Environmental 
We’ve seen a wide variety of reward initiatives with environmental aims, which aim to change behaviours from individual actions all the way up to corporate level. Some aim to link employees’ personal choices to company success. One method is using tools like Greenrspace, an engagement platform that rewards employees for making behaviour changes which support wider corporate environmental goals. When employees undertake desired behaviours, they earn vouchers or can give a donation to charity. Other initiatives aim to align organisational green agendas with employee wellbeing, creating a buzz and momentum at the same time.

Some engagement platforms reward employees for taking positive steps that both improve the environment and enhance personal health and wellbeing. Modules in the programme include cycling to work, recycling in the workplace, volunteering in the community, and monitoring personal fitness levels. Employees are rewarded with points, so for each positive step such as cycling a mile to work, an employee earns points that can be donated to selected charity projects or spent in the platform’s shop.

Other organisations are looking to create broader responsible investment strategies with their pension funds, by considering ESG issues when making investment decisions. This doesn’t just mean withdrawing from or avoiding certain companies or sectors, but also engaging with them to push for change, and taking part in shareholder activism. 

We are seeing more high-profile challenges around the mismatch between what companies say and what they do in practice. See the recent case of an employee of the League Against Cruel Sports (an animal welfare charity) who raised concerns that the League’s pension scheme invested in funds which seem antithetical to its purpose – including in companies that experimented on animals. These types of challenges have significant reputational impact and we expect this trend of increased accountability to continue. 

Social 
The Social part of ESG encompasses all aspects of the employee / employer relationship, but when we think specifically about responsible reward there are many different illustrations of how it can play out in practice. There is evidence that making reward or recognition more inclusive has better results. Analysis of schemes where colleagues can nominate each other for rewards based on good performance shows that usually nominees derive more value from the communal recognition that the reward itself. The social acknowledgment makes the experience a more meaningful and constructive one than if it were based on material benefits alone.

This idea of social recognition can really help to improve motivation and job satisfaction. For example, a study showed that randomly selected employees at an Australian bank who received bonuses in form of company payments to local charities reported greater and more immediate job satisfaction than colleagues who didn’t get the same opportunity.

Charitable giving is often the most visible way companies demonstrate social impact, with many now linking their financial performance with positive social outcomes in response to pressure to act responsibly. Salesforce donates 1% of their profits to charities and also gives employees a full week off a year to volunteer. BrewDog go even bigger and donate 20% of their annual profits.

Engaging employees with Responsible Reward
It’s not just about the money you are seen to give away or the good you do in the world. How you take care of your people and look after their overall wellbeing is also becoming a transparency issue. Whether it’s investors, employees, trade unions or the media, there are increasing calls to demonstrate that you are living up to your reputation. Essentially what people want to know is this: how do you show you are doing the right thing?

We think it is vital to look at reward holistically and take a strategic perspective when you consider Responsible Reward. But before you dive and in write a new set of policies, we would suggest that you stand back and look not just at the different numbers legislation requires us to define, but think about the true application of reward in your organisation as it stands right now. To start your journey in engaging employees with your responsible reward policies, here are our top three tips:

1.    Show what progress you are making with your diversity and inclusion ambitions: simply publishing the numbers isn’t enough, you need to demonstrate what actions you are taking to close the gap. Equally, a strong narrative to explain where the gap has come from can go a long way.
2.    Align corporate environmental strategies with employee wellbeing: there are many ways you can make progress with your corporate goals whilst simultaneously improving your employees’ wellbeing. Cycle to work schemes, and providing opportunities to participate in volunteer work are just two examples that are simple to implement and can go a long way.
3.    Show you are living up to your reputation: transparency is key – being open and honest about the ESG goals of your organisation and how you are going to achieve them is a great way to engage your workforce. For example, by aligning bonus plans to ESG goals so that they become an integral part of the way you focus your reward.

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