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The ESG Interview: Making People a Priority

There are no short-cuts to tackling social risks, says Lumorus CEO Romeo Effs, who insists diversity amounts to tokenism without inclusion.

Nearly four and a half million US workers quit their jobs in the year to September 2021, according to figures from the US Labor Department, many doing so in direct response to pressures from the Covid-19 pandemic.

According to the Randstadt Workmonitor, two thirds of people surveyed across Europe, Asia Pacific and the America ‘feel empowered’ by the pandemic to change their work/life balance, and a quarter expect to leave their jobs within the next three to six months.

This mass exodus – coined variously as The Great Resignation, the Big Quit and the Great Enlightenment – acts as a reminder of the importance to companies in taking care of their workforce.

Romeo Effs, CEO and Founder of Lumorus, a UK-based consultancy helping companies manage their social and governance risks, says: “The central focus of the social component in ESG is on how companies manage their relationships with their workforce; their customer base; suppliers; and the communities and political environment in which they operate.”

The Great Resignation

Effs says during pandemic-induced lockdown conditions, while working at home, employees became aware of their “psychological safety” in the workplace – which translates to their overall wellbeing. In many cases, people recognised that their working conditions pre-Covid were substandard, or that they were being forced to prioritise work over home life. This recognition has been the catalyst for the Great Resignation, he says.

“’S’ is what really drives the value of a business because it is people who make and deliver the goods and services. Covid really brought home the reality that companies have not been focussed on the S of ESG and that a failure to do so risks damaging their business and shareholder value.”

That companies are now facing a talent shortage is, according to Effs, symptomatic of business leaders’ failure to look beyond diversity when considering their social risks.

“There has been too much focus with ‘S’ on diversity and companies are not looking at everything else. Diversity is the easiest thing to achieve; you can pretty much ask any black man, gay person or woman to come and work for you, and offer them lots of money to do so. But when they turn up at work, the environment is toxic and not inclusive and does not allow them to be themselves to work, and ultimately doesn’t achieve anything.”

Effs says “the whole notion of diversity peeves me as it tends to be box ticking exercise”, and that companies are failing to appreciate the importance of inclusion.

“When we work with businesses, we tell them to look beyond diversity and talk about inclusion, which means everyone is part of the same stream. That includes straight white males who now feel alienated because there is so much focus on gender, LGBTQ, ethnicity and disability.  We can’t achieve diversity and inclusion without them because they are the ones who still hold the power, who make the decisions, and who make up the majority of company boards.”

Avoiding tokenism

There is mounting evidence of the growing importance of social factors to asset owners, including rising expectations for both asset managers and underlying companies on diversity and inclusion.

Effs recommends asset owners look out for companies that appreciate the differences in the members of their workforce. He says rather than trying to force all employees into a box marked ‘company culture’, they should redefine the workplace to allow individuals to find common ground.

“Organisations need to understand their make up and ask people to help build that company culture. This is where the belonging piece comes, and it helps prevent office politics and encourages productivity. There is a new wave of how the S is viewed, and companies are starting to move away from monolithic workplace silos.”

It is no great surprise that companies favour diversity since this is where it is easiest to gather the data needed by asset owners, regulators and auditors to assess social risk.

However, coming back to Effs’ concerns over tokenism, he says this data offers little real insight into progress with managing social risks and opportunities.

“That hard diversity data is out there – how many women on boards, attrition rates for example. The trouble is asset managers tend to use these numbers as the’ Holy Grail’ when advising asset owners on where to invest. But it does not help you know how inclusive the organisation is.”

“Lazy” assumptions

Effs goes as far as to suggest asset managers can be “lazy” in their reliance on the easier-to-come-by diversity data adding: “[Asset managers] don’t dig deep enough in investee firms to ensure the information they are getting is transparent and adds value.”

In response, Lumorus has established a Cultural Diagnostics Index, developed by behavioural scientists and neuropsychologists, which measures cohesion (how accepted people feel); engagement (how committed individuals are to the team and workplace); and satisfaction.

Effs concedes it is “an uphill battle” to get organisations to understand the importance of using these metrics, but says they are starting to recognise that wider stakeholders and investors are taking inclusion more seriously.

And returning to the impact of Covid, he notes that asset managers that force employees to return to full-time office work may have a precarious future if they do not appreciate the importance of accommodating individuals’ need for a better work/life balance.

“A lot of finance institutions are insisting employees come back to work and have failed to understand the wellbeing component of working from home. They could find they are missing out on talent in the future,” Effs warns.

Lumorus, in conjunction with former employees of the World Economic Forum, is also creating a social taxonomy, which Effs says will be available in the next year. This will break down the ‘S’ of ESG into areas including ethical supply chains and adequate health and safety, which Effs says will make it easier for companies to measure their social risk.

Community action

In addition to considering internal social issues, companies need to do more to manage their impact on the wider community, Effs says. This is where responsibilities to people overlap most clearly with responsibilities to the planet.

“Companies need to engage with the local communities and ensure they are protecting habitats and not dumping stuff in the water for example.”

This was a hard lesson learnt by mining firm Rio Tinto after it blew up two sacred Aboriginal sites in the Juukan Gorge, Western Australia in May 2020. The company was dragged through a damaging parliamentary enquiry which resulted in the resignations of Chair Simon Thompson and CEO Jean Sebatian Jacques. The mining company has since promised to engage with local people and will produce an annual communities and social performance report.

Alongside work by the private sector to raise awareness of social risk, Effs would like to see policymakers provide more robust guidance to support company reporting and the subsequent analysis by asset owners.

“The UK Corporate Governance Code has been amended to include reporting disclosure components around the S but a lot of companies are struggling with how to meet that, leading some to manipulate how they report their data,” he says.

Nevertheless, Effs is confident that there is positive momentum on pushing social risks up the agenda for both company directors and investors. “How companies treat their employees and the communities in which they operate should be important to asset owners and they must scrutinise the information they receive if we are to avoid social washing on the same scale that we have seen greenwashing,” he says.

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