There has been much discussion in Environmental, Social, and Governance (ESG) circles about people and the central role employees play in building and sustaining business value. In addition to increased pressure from vocal employees and shareholders, it is likely that companies will face new workforce disclosure rules and supply chain due diligence requirements globally.
Last year the U.S. Securities and Exchange Commission recognized that a company’s human capital management strategy and ability to attract and retain talent is a material issue for investors. New SEC Chair Gary Gensler has asked staff to consider new disclosure for a number of metrics “such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”
Investors agree this is an area where companies need to provide more transparency and better outcomes. The Investment Company Institute, representing the mutual fund and exchange-traded fund (ETF) industry, has called for more disclosure into human capital data, saying it would provide insight into a company’s management and investment in people, an indicator of long-term value. And $3 trillion behemoth State Street Global Advisors has given companies a three-year roadmap for increasing transparency on racial and ethnic diversity goals, strategy and metrics for the workforce and board of directors, and increased engagement on employee health and supply chain issues.
And increasingly, employees know their worth. We’re seeing major disruptions in the labor markets, driven in part by the pandemic, as more people are changing jobs or careers and demanding new ways-of-working that deliver a better work-life balance.
However, some workers are missing out on this moment and remain unseen and underrepresented in the move toward a fairer and more equitable workplace. This invisible workforce stretches across the value chain, and ranges from forced labor in raw material sourcing or service sector workers who are “off the books,” but all of whom contribute to the high standard of living that many of us enjoy. And while issues related to modern day slavery, human trafficking or forced labor are not new, they remain pervasive and touch most industries from agriculture to technology.
The European Union has taken a global lead on these “hidden” workforce issues that could deliver progress in terms of both pressure and tools to help companies better understand and address labor practices across their supply chains. In July, the EU issued new Guidance to help companies combat forced labor in their supply chain as part of the EU trade strategy. It provided practical advice on how to identify, prevent, mitigate and address these risks. The Guidance is a bridging measure until legislation on Sustainable Corporate Governance is in place, which will introduce mandatory due diligence.
This strategy is being combined with efforts to “follow the money” and use the financial system and big data solutions to prevent and root out abusive and illegal labor practices. The EU’s ambitious anti-money laundering package, also proposed this July, calls for tighter regulation and encourages coordination between the public and private sectors to combat illegal activity like human trafficking and slavery. These efforts will be aided by technologies like artificial intelligence (AI) and behavioral analysis that will help with surveillance and investigations.
So, what does “good” look like for companies going forward? Some companies will discover hidden vulnerabilities become public reputational and legal issues, while for others this will be an opportunity to acquire new leadership, talent and organizational muscle and competitive advantages. Here are three takeaways:
- Experts believe that proactively addressing ESG issues translates into heightened competitive value for companies given improved brand perception, and increased talent attraction, retention and motivation. While it may seem like a no-brainer, new kinds of leadership and engagement are needed to tackle the deeply rooted and often invisible challenges of a full assessment of supply chain operations to root out modern day slavery.
- As numerous surveys have revealed through the COVID-19 pandemic, consumers care about how companies treat their employees and say they are translating these values into brand preferences and purchasing behavior. Relevance with consumers will drive firms to seek competitive advantages for marketplace gain, but they will need to be authentic and guard against purpose-washing. This will include clear actions and commitments to committed to drive out acts of modern day slavery from within direct operations and supply chains.
- Much as reforms in the early 2000s set a new professional standard for corporate governance and transparency, the next wave will require much more robust strategies, disclosure and compliance requirements around workforce and supply chain issues, including disclosures around next-tier suppliers.