Environmental, social, and governance (ESG) disclosures are playing an increasingly prominent role in investors’ decision-making process. Those are the factors that investors are considering when analyzing the sustainability and ethical impact of a company’s operations. The increased interest that investors have shown in ESG information is likely due to a heightened awareness of how disclosing this information can impact the financial sustainability of companies. Workplace health and safety is among the ESG factors disclosed.
ISO 45001 is the first-ever international standard on health and safety management. Bloomberg Tax spoke with Dr. Alan Kao, Principal of Ramboll Environ, to discuss the implication of this new international standard and how it will affect companies’ ESG disclosures as well as investor decisions. Ramboll Environ is a consulting firm focusing on environmental, health and social issues.
Bloomberg Tax: Can you talk a little bit about this new international standard? Why is it important to companies and investors?
Kao: Workplace health and safety is among the issues most widely recognized by investors. Investors use those metrics to measure how sustainable a company is. Work injuries and illnesses can disrupt companies’ operations. Having a good a good system can reduce downtime, turnover rate, and possibly reduce insurance premiums. Employers are sustainable when they ensure the safety, health, and welfare of their workers. The new ISO 45001 standard--Occupational health and safety management systems--provides companies a guideline on how to record workplace health and safety metrics in their ESG disclosures. Providing a model to follow when setting up and operating a management system. It will affect the way companies disclose health and safety information in different degrees depending on how well they are recording those information today.
Companies are also starting to realize that investors are not only looking at the statistics, but they are also looking at how well companies are recording their health and safety metrics. They realize that investors are trying to figure out if they have a good system in place to manage their workplace health and safety--they want to know the reasons behind the numbers.
Companies who are the leaders in disclosing ESG factors and who want to enhance investor confidence in their sustainability reporting will be the first to get certified by ISO 45001.
Bloomberg Tax: Is there a correlation between companies’ workplace, health safety system and their financial performance?
Kao: There are studies that suggest a positive correlation between ESG management and financial performance. For example, the Calvert/Harvard Business School study (Serafeim et al. 2016. The Financial and Societal Benefits of ESG Integration: Focus on Materiality. The Calvert-Serafeim Series).
In the Serafeim study, they assigned ESG scores to a portfolio of firms and compared the financial performance over time for the companies that were in the top 10 percent for ESG scores and the companies that were in the bottom 10 percent for ESG scores. The companies with high ESG scores had better financial performance than the companies with low ESG scores.
This is one reason some Private Equity firms are focusing on ESG for their portfolio companies. It’s not necessarily a causal relationship--good ESG performance will result in good financial performance. But good ESG performance is an evidence of a well-managed company. Meaning, if you are not managing ESG well, then you are probably not managing other aspects of your company well.
Bloomberg Tax: Regarding the ESG disclosures overall, are the companies who are doing better in disclosing the social/ governance factors also doing better in disclosing the environmental factors?
Kao: Yes, I would say environmental factors are disclosed more regularly, and there is greater variability in the extent to which social and governance factors are disclosed.
Having a sustainable workplace is important, both for employers and the economy. To combat this problem, ISO is developing a new standard named ISO 45001 (Occupational health and safety management systems - Requirements) that will help organizations reduce this burden globally by providing a framework to improve employee safety, reduce workplace risks, and create better, safer working conditions.
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