What leaders can do to address the “S” in ESG

While this focus is imperative, environmental issues are not the only part of ESG that deserves close attention. Law makers and regulators around the world continue to raise expectations on companies through new laws like the US’s “End Human Trafficking in Government Contracts Act of 2022” and the “Uyghur Forced Labor Prevention Act”; the EU’s proposed “Corporate Sustainability Due Diligence Directive” and “EU Forced Labor Product Ban”; and the changes to the US “Customs Trade Partnership Against Terrorism – Trade Compliance Handbook,” which require a social compliance program to mitigate forced labor risks.

Thinking about how to define and measure social progress raises the question of organizations’ relationships with their workforce, society and politics. Companies’ “S” focus largely appears to be on the diversity, equity and inclusion (DEI) metrics.

This focus on DEI issues is certainly important, but other social issues also need attention.

Next

In the Forensic & Integrity Services practice of Ernst & Young LLP, we have seen a dual focus from some clients: how to drive business through social measures and how to manage the risks posed by the increased attention to social activities — specifically, their company’s relationships with its employees, contractors and third-party supply chain (workforce ecosystem).

Most industries face human rights risks through their workforce and especially where they are using laborers. Several industries facing increased risks, include manufacturing, consumer products, agriculture, health care and technology. Foreign workers in the construction and offshore drilling industries pose a risk. And in the real estate sector, laborers engaged by the property management companies create risks.

As countries announce human rights-driven regulations, business leaders everywhere should ask themselves is their organization concerned about human rights risks in its workforce ecosystem or are they treating its social measures as a growth driver for the business.

Some companies quickly identify their supply chain as the main area of concern instead of first examining their own operations. When assessing risk within its supply chain, the organization should assess the possibility of human rights violations such as forced labor since the company is ultimately responsible to the regulators. Additionally, companies should ensure a sound understanding of supply chain participants and enforce audit rights over those deemed high risk. It is important that companies not ignore their own employees and contractors in the process of assessing the risk.

Beyond

The chief compliance officers of some of our clients have been asking more questions about the role compliance should play in both assessing this risk and monitoring the control structure to prevent and detect violations.

Many companies face challenges with workers on their payroll, those paid through staffing agencies and contract manufacturers in the company’s supply chain. As a first step, we recommend that you assess your company’s human rights risk, keeping the following red flags in mind:

• Are regulatory requirements across jurisdictions understood?
• Are foreign workers’ passports held, preventing them from leaving the country?
• Are the workers who reside in dormitories living in unsafe or unsuitable living conditions?
• Are there “classes” of workers who are paid different rates for the same work or skill?
• Are underage, migrant workers involved in restricted, dangerous jobs in the US and beyond?
• Are workers unable to leave jobs because of debts they were forced to assume in getting hired?

Based on the results of the risk assessment, each company will assess if additional evaluation and/or considerations are necessary for improvements in its own workforce or in its supply chain to achieve its desired state in regards to the “S” of ESG.

The next parts of our social series will focus on how to effectively monitor a company’s operations and supply chain for human and business rights risks from a regulatory and compliance view. Subsequent topics include data analytics, investigations, governance, supply chain due diligence and counterparty requests for human rights certifications.