The ‘S’ in ESG: measuring, managing and incorporating social issues

05 September, 2023

The ‘social’ elements of ESG are rising in prominence, having played a secondary role to the environmental and governance pillars for some time. This lack of focus is partly due to the fact that environmental and governance issues are much more clearly defined and regulations in these areas are better developed—but things are changing. Local gender pay gap reporting regulations are being rolled out and the EU Pay Transparency Directive will be a game-changer. These, coupled with changing consumer preferences and employee attitudes, are prompting companies to increase their focus on social issues.

The ‘S’ and tax contributions

The social pillar of ESG looks at an organisation’s contribution to societal fairness. Total tax contributions are key in this regard, as tax is a key indicator of an organisation’s contribution to society.

While the media often focuses on the level of corporation tax earned by the State, it is important to remember that companies are responsible for collecting income taxes via the PAYE system. In 2022, PAYE income tax and the universal social charge (USC) amounted to €25.46bn. This equates to 30% of total Exchequer receipts.

In addition, by paying employers’ PRSI (11.05%), employers are a significant contributor to the Social Insurance Fund, which funds social welfare benefits and the State pension.

These are important components of an employer’s role in contributing to society via the tax system. This can increase trust in the market and promote an organisation’s overall purpose and values.

The ‘S’ and pay equity

When it comes to ESG and pay, the focus tends to be on linking executive pay to ESG goals. However, through an employment lens, an ESG strategy isn’t complete unless it addresses issues relating to all employees and supports the growth of a truly diverse workforce that is treated fairly, paid equitably and without bias.

Equal pay

In Ireland, equal pay provisions are contained in the Employment Equality Acts 1998 to 2021. Under this legislation, an employer is prohibited from paying an employee less (either directly or indirectly) in the same employment doing ‘like work’ on nine different grounds of discrimination.

Although an organisation may be fully committed to equal pay, businesses must review their pay systems and consider carrying out an equal pay review to highlight issues they may not be aware of. If there are equal pay gaps, organisations must explain why. And if no reasonable explanation can be found, steps must be taken to close the gaps.

Gender pay

Even if employers comply with equal pay obligations, they may still have a gender pay gap.

Our analysis of 500 of the country’s largest employers that published gender pay gap reports in December 2022 found a mean gender pay gap of 12.6%.

Firms must file new reports in December 2023 based on their situation in June. Progress in closing the gap will require a concerted effort that is enabled by HR, but led by business leaders, to improve the representation of women in their businesses.

Pay transparency

While many organisations already monitor pay equity, the EU Pay Transparency Directive—which will likely come into effect in 2026—introduces additional pay transparency measures. Key features of the Directive include:

Recruitment: an obligation on employers to provide information concerning pay levels as part of the recruitment process and a prohibition to prevent organisations asking candidates about their current or historic pay.

Pay philosophy: a requirement for employers with more than 50 workers to share information on the criteria used to determine pay levels and progression.

Pay information: a right for workers to request information on the average pay level split by sex for workers doing the same work or work of equal value.

National minimum wage

Another area of focus for employers is the national minimum wage (NMW). This concept is central to ensuring fair pay and workers’ rights.

Over the last few years, HMRC in the UK has deployed more resources to investigate employers that breach NMW regulations. Also, in 2021, the UK Government called out 208 employers for not paying their employees the minimum wage. Many of these employers were household names.

The UK experience reinforces the need for employers to understand legislative components around the hours that must be paid for, the category of worker, and the pay that can be considered in determining whether NMW compliance is achieved.

The ‘S’ and worker classification

Spurred by COVID-19, on-demand labour platforms have grown. These offer new job opportunities for workers and convenient, more affordable services for consumers.

The gig economy has become a hot topic in many societal and political debates. The debate primarily focuses on the workers’ working conditions and social security status.

In Ireland, there are many ways to work and operate a business. Specific legislative protections for workers apply to each type of employment.

For employers, it is important to ensure workers are correctly classified in a way that matches the reality of the relationship between the worker and the business. The misclassification of an individual can impact tax, social security and employment law rights and obligations. It can also lead to reputational damage if a company is perceived as treating workers inequitably.

Three key actions to take now

Organisations must have internal policies, processes, systems and data flows to meet the increasing and ever-changing regulations that underpin fair pay and worker rights.

Employers cannot afford to ignore these three priorities:

Understand what legislation requires and the financial and reputational implications of getting it wrong.
Ensure that your strategy, processes and systems are robust and accurate.
Validate your organisation’s ability to produce the necessary statistical data to ensure compliance with the legislation. And if you cannot, identify the gaps.

Employers should also begin crafting the narrative to explain how they support social progress—treating employees fairly, driving equality and acting as responsible corporate citizens.