AON’s Aria Glasgow on Managing ESG and Human Capital Risk

by | Jan 31, 2023

BA Speaks to Aria Glasgow, Head of North American ESG Advisory at Aon

In the latest episode of Know Who Drives Return we sit down with Aria Glasgow, who leads AON’s ESG Advisory practice. In her role Aria helps advise companies understand and prioritize their ESG (Environmental, Social, Governance) risks.

As ESG continues to become top of mind for corporates, Aria discusses several areas that companies should be concerned about, including compensation and incentives, DEI initiatives, the need for better data and reporting, and board oversight.

For example, while 70% of S&P 500 companies include some form of ESG metric in their executive compensation plan, most are strictly focused on diversity alone, and still make up just a small portion of overall compensation incentives.

ESG, while a hot topic item in terms of alpha generation and investing, is not going anywhere any time soon and companies should make sure that they are on top of 1) their requirements and 2) get ahead of the curve for any further (mandatory) guidance that is to come.

Have a listen, it was a very informative discussion.

Topics Discussed

  • Background & Intro
  • Intersection of Human Capital and ESG
  • Boards of Directors and their role in HCM
  • How are companies addressing the risks
  • ESG and compensation incentives
  • What to expect in 2023?
  • What leaders can do to mitigate their human capital risk

Transcript: AON’s Aria Glasgow on Managing ESG and Human Capital Risk

David Drapkin (Boardroom Alpha)
Hey everyone, welcome back to Know Who Drives Return, I’m David Drapkin. Today, I’m delighted to be joined by Aria Glasgow, who’s the head of ESG advisory at insurance company AON. I’m super excited to talk to Aria about what’s the latest in ESG, its intersection with human capital, and trends and implications for 2023. So Aria, thanks for taking the time here to talk to us today.

Aria Glasgow (AON ESG Practice)
Thanks so much for having me. I’m happy to be here with you today.

David Drapkin (Boardroom Alpha)
Awesome. So how about to kick things off with a little bit of introduction? Who who is Aria? Where do you come from? about your background?

Aria Glasgow (AON ESG Practice)
Sure, no problem. Well, I lead a North American ESG Advisory Group, and I’m part of our Corporate Governance team. And for our smaller clients who might be overwhelmed with the ESG alphabet soup, we help them with their ESG strategy, providing a roadmap knowing where to start and address their short term or long term priorities. And then for our larger clients, they’re usually interested in what everybody else is doing and what their key stakeholders like their investors want them to do. So we’re doing a lot of benchmarking, helping them understand some of their gaps and what what to focus on. And it’s, it’s, it’s chilly outside, there’s beautiful snow here, and I like to skate. So one of the ways I describe ESG, and my job is if ESG was a mountain and our clients or accompanies or skiers, what we do, and everybody’s trying to improve their performance, right. So you’ve got all different skiers, while different types of abilities, and types. And what we’re doing is we’re riding the mountain report. So we’re letting the skiers know what the conditions are and what the upcoming storms are. So just like our clients in different industries and stages this year, we’ve got our, our greens are double blacks. And we’re helping novice skiers understand like, here’s the hill that you need to focus on, and is going to events, but then our our back country, double black diamonds, they need to understand avalanche risk. And there are our novice green skiers might not even need to focus on in the immediate future.

David Drapkin (Boardroom Alpha)
The different flavors depending on level and focus, and now you’ve got me now you got me itching to go skiing.

Aria Glasgow (AON ESG Practice)
Yeah, right. Me too. Me too. I love it. Yeah. And then, in terms of my background, I’ll segment into three, three quick parts. First was financial services. I was an accounting major, I thought that was my path. And then I moved over to compensation consulting. And I did that for a number of years, where I helped boards and their leadership design compensation plans that were competitive and equitable. But then I started to get really interested in ESG, and how companies were showing up in terms of sustainability, corporate purpose, their social environmental practices, and then corporate governance. So I took on a few internal projects and went back to school, I did some learning on my own. And then when the opportunity presented itself became the head of ESG for North America advisory services here. And, and yeah, I love it. We’ve got about 50 employees here all helping clients. And one of my focuses, given my background is ESG and human capital.

David Drapkin (Boardroom Alpha)
Yeah, so you know, we hear a lot in the investing world of ESG on a pure investing side, today let’s dive in a little bit to the human capital angle. So, how does ESG and human capital interact?

Aria Glasgow (AON ESG Practice)
Yeah, sure. It’s a good question. So human capital is in in the big S of ESG, in the social factors, and it’s all the companies related to your workforce, from hiring to culture, to diversity, compensation, turnover, it’s everything related to attracting, retaining and evolving your employees. And all of these things come together to impact a company’s performance. So human capital is an asset because you’ve got all these people working to help your company, but it’s also a material risk. And no company can be successful without the right talent. So you’ve got multiple stakeholders, including your investors. They’re asking, well, what’s your company doing to protect this risk and enhance your human capital strategy? How are you retaining your employees? How you’re engaging your new ones? And how do you have a resilient workforce? And these, I mean, these aren’t new ideas by any means, but the way we view them now as material risks within ESG, is different.

David Drapkin (Boardroom Alpha)
Yeah, it seems to be, you know, as the as the movement has gained momentum over the years, and now it’s something that companies really need to be focused on, to make sure that they’re ahead of the curve in terms

Aria Glasgow (AON ESG Practice)
Exactly.

David Drapkin (Boardroom Alpha)
Which leads me to my next question. So we’re obviously very focused on the board and directors role the director, how do you view the board’s role in this situation?

Aria Glasgow (AON ESG Practice)
Yeah, no, that’s a that’s a good question. And it’s certainly evolving, and most boards now have oversight of human capital. So they’re responsible for managing and understanding human capital risk. And this is a big change from years ago, when I was in executive compensation consulting, the boards want us to understand that. But all the other human capital side was just a line item, it was maybe how many employees do you have? It was nothing more. Now, that’s all shifted, and we’ve have compensation committees becoming human capital committees. And because of this shift, we see human resources leaders and other business leaders within the company. They’re on the hook now to provide the board with more statistics related to their human capital programs or risks. So this is anything from turnover to retention, compensation, of course, for your workforce, not just your executives, but for your workforce. How competitive is it? How equitable is it? Your engagement scores, pay equity reports. And we’re seeing a lot of these are showing up on your 10-K. And so if you’re a board member, you want to be asking for your human capital metrics, and, and then also overall trends and these metrics.

David Drapkin (Boardroom Alpha)
I will get into a little bit about disclosure later. How about some examples of how companies are addressing this.

Aria Glasgow (AON ESG Practice)
Sure, so let’s talk about workforce diversity, because that’s an area that we’ve certainly seen evolve internally, which is a great thing, but also from a public disclosure perspective. And all companies now have a statement about the importance of diversity, equity and inclusion, or at least most of them do. If they don’t, they should. But it, it goes, it goes beyond that. And say, for example, you have diversity statistics, that you might not be as happy with where they are right now. Maybe there’s not enough women in your leadership, or there’s not enough racial diversity in particular department. So the first step there is to understand the why. And is it because you can’t attract the the right talent for those roles? Or are people leaving? And if they are, why? And so this gets back to the data just to really dig in. But then what are you doing to try and move the needle? So investors and rating agencies, they’re not expecting for perfection when it comes to diversity or gender, but they want to see improvement? And then they also want to see, well, what are you doing to try and address these gaps? So we’ve seen some companies. And this all gets into like, what they’re publicly disclosing because if you’re doing it internally, and you’re not disclosing it, you’re not getting credit for it. So we’ve seen more disclosures around things like is there a women leadership advancement, formal program that they have, or maybe for racial diversity, they’re coming up with the different ways to attract new talent or sourcing in different areas, or making sure that their employees are going through bias training, if they’re interviewing candidates? It’s things like that, that we’re starting to see more on the sense of public disclosure.

David Drapkin (Boardroom Alpha)
One question I had just came up this morning, and I don’t even know it might be too early to have a comment on it. But I read a story that, you know, given this era of layoffs, that we’ve been in the last three or four months that your DEI positions have looked to being being reduced, you know, human capital teams that are out there, how do you how do you look at that?

Aria Glasgow (AON ESG Practice)
Not favorably. Not at all. Because this is something that you need, it’s more important than ever, because your employees that are still there, right? Your existing employees, they need to make sure that they’ve got that sense of belonging, and that they feel like they’re being included in, in in their programs. So I’m hoping that we don’t see too much in terms of cuts in those areas.

David Drapkin (Boardroom Alpha)
So we talked about, you know, companies having targets or programs. And then you’re kind of when it comes down to it, you know, folks need incentive to sort of hit on these things. So, you know, we’re hearing a lot about companies using ESG, and compensation incentives. What are you seeing in that in that arena?

Aria Glasgow (AON ESG Practice)
Yeah, though we’ve certainly seen a lot there. And right now, it is just focused on executive compensation incentives with that we might see that evolve over time. But that’s generally where we see it. And I love this topic, because it brings my my old world of designing incentive plans and my new world of ESG, to gather. And we just did a study last fall with the, the S&P 500 and look to see like, how many of them are including an ESG metric in their executive center plan. And it was close to 70%. And they’re like, oh, my gosh, like everybody’s doing it, we should do it. But there’s a couple caveats with that. One, is the percentage decreased significantly for companies that were in the S&P 500. And then two, we look to say, well, what are these metrics? Is everybody measuring climate and climate targets? And the answer was, No, that was just a few of them. Most of them, if they have an ESG metric, it’s something around diversity, which is obviously a good thing. It could be succession planning talent, we’ve seen some safety in there. So that’s what we generally see. But the other thing to note, too, is that if you’re not already measuring it, don’t put it in the incentive plan to put in a program have the program first, so that you know how to measure it, and and, and track it. And then if it’s just like your your financial goal, right, you wouldn’t want to make sure that there’s there’s a clear metric and clear measurement before you put anything in place.

David Drapkin (Boardroom Alpha)
That makes sense, start with the goal and then then work it into your incentives. And so it but is it a big part of compensation? Is it is it so small? Do you think it should be a bigger a bigger part?

Aria Glasgow (AON ESG Practice)
Well, it’s executive compensation. So the amount is always large. Because you’re basing it on the basis, relative basis, but yeah, from a relative basis? It’s no it’s not very large. We usually see, I don’t know 10 15%. It could go as high as 20, maybe maybe 25. But But generally, it’s around 10 to 15%. And your your public disclosures to need to describe not only how you’re measuring it, but how you measure payout, so it’s important to get that right. And then with any compensation design, particularly incentives, there’s a lot of different ways you can do it. You can have it like a straight weighting or some sort of modifier or a balanced scorecard approach. Now there’s a lot of different flavors to how you do incentives. And what we would suggest is start small. Increase it.

David Drapkin (Boardroom Alpha)
Yeah, overtime.

Aria Glasgow (AON ESG Practice)
Yeah, definitely.

David Drapkin (Boardroom Alpha)
Well, at the very least at least, it’s seems to be a positive trend. More companies are doing it and holding the executives accountable.

Aria Glasgow (AON ESG Practice)
Exactly. Exactly.

David Drapkin (Boardroom Alpha)
So that, you know, looking ahead to this year, you know, what are some things that, you know, we should be looking out for maybe changes or trends, or otherwise?

Aria Glasgow (AON ESG Practice)
Yeah, no, that’s, that’s a good question. I wish I had a crystal ball. But in terms of trends, I think the first one is pretty current, a lot of companies and their boards are putting together their 10k right now and other publicly disclosed filings. And you need to disclose your human capital strategy. And this is our third year of being required to disclose human capital strategy. But we haven’t received any new guidance. So we don’t expect that there’s going to be too many material changes for 2023, you’re probably going to say, this doesn’t really sound like too much of a trend, but I’ll get there. So what we’ve what we’ve heard, is that the SEC later, this spring, I think, March or April, they said that they’re going to come up with some new guidance on human capital management. Now, we thought it was gonna be last fall. So now it’s a spring. So hopefully, it doesn’t get pushed. But what we expect is that we’ll see more in in terms of what they’d like to see. So more quantifiable metrics. Now, we don’t know what these are going to be yet. But what we would imagine they would be are things like turnover, compensation, diversity, maybe even engagement scores, that that companies are going to need to collect. So the trend, I think, is going to be more data collection after that guidance comes out.

David Drapkin (Boardroom Alpha)
I think that’ll be like a standardized situation?

Aria Glasgow (AON ESG Practice)
I hope so.

Aria Glasgow (AON ESG Practice)
I think that’ll make it a lot easier. Because right now, everybody’s guessing.

David Drapkin (Boardroom Alpha)
A lot of what we see in all sorts of ESG reporting, it’s all over the map.

Aria Glasgow (AON ESG Practice)
Yeah, it’s it’s all over the map. And it’s improving. And, you know, two years ago, we saw how everybody is responding to COVID, which is obviously very material, very important. But then last year, we saw a lot of the same companies just keep that same language in, well, it’s time to tidy that up a little bit. So hopefully, now we’ll start to see more standardization.

David Drapkin (Boardroom Alpha)
You can’t do that for three years in a row right?

Aria Glasgow (AON ESG Practice)
Yeah, yeah. And then I guess, like the the other trend, really related to ESG. And Human Capital Management gets to how the work is being done. So if you’re, if you’re on a board and that director, you know that ESG is taking more time in committee meetings, and it’s a lot more time for company staff, it’s a lot of coordination, both the day to day and the long term where you’re, you’re writing sustainability reports, you’re worried about your ratings, you’re doing pay equity studies, and there’s companies like like ours, that can and others that can help take the load off for you. And something that comes to risk monitoring. We’ve got an old new tool called digital business insights that does exactly that. But we would recommend that companies start to take a look at 2022 and look at their their ESG roles. And see, like, what worked well, what didn’t, what are you going to keep in house? What’s the board going to do? What do they have oversight of? What do you need to outsource? And what do you need to hire for when it comes to ESG. And a good example of that is we’ve seen a lot of companies starting to secure more talent around measuring and assessing climate risk. And this is something that has another trend, really, it’s there’s pending climate legislation here. And then the EU just adopted the corporate sustainability reporting directive, which is going to impact some US companies in the coming years. So you’re like, Okay, well, this sounds more like the E right and the environmental not human capital, but where I see it being human capital is human capital is usually the function are responsible for sourcing and securing all this talent. So things like climate where you don’t have ready, ready talent at your company, this is something that you’re going to need to start to look at to figure out. Alright, where am I gonna get this this talent? And do I need to upskill any of the this, the people that I need right now. The same is true for boards, by the way, if they don’t have that expertise on their board.

David Drapkin (Boardroom Alpha)
Right, making sure, you know, we spoke to some folks earlier this year about, you know, making sure you have at least one or two board members who have the relevant ESG background to a provide oversight and bring that expertise into the boardroom where,

Aria Glasgow (AON ESG Practice)
Exactly, and ESG oversight, there’s three letters to ESG. So you could have one person that’s really strong in the S, one the E, and then of course, corporate governance, and getting all three of them is is sometimes challenging for one particular member. So you see, it could be that it’s a little bit spread out in terms of your overall ESG expertise.

David Drapkin (Boardroom Alpha)
Right. Right. And I know we spoke a little bit about this in various forms. So what if you’re a leader, CEO, what can you be doing to mitigate some of this some of this risk?

Aria Glasgow (AON ESG Practice)
Yeah, and, and I think, for board members, too, I mean, obviously, we’re, we’re in a time of, of change. And I was, quick, quick aside, I went on a trip this winter. And we were at a nice warm place, and it was overcast, and we decided to take a sightseeing excursion to this island, and wasn’t real clear what the boat we were getting on and a lot of confusion. So anyways, we get on a boat, it was not a pleasure cruise, it was they put us kind of in the basement, or whatever lower level, not the basement, lower level. And all the windows were what had screens out, see, so you couldn’t see out at all, and you couldn’t see where you were going. And it was, it was not a fun ride at all, it was pretty horrible. And it kind of what we’re going through now, because you know, you’re eventually going to get there. But you can’t see how choppy the water is, and you can’t see your destination. And that that feels like what a lot of us are facing. So in terms of what we can do get on a different boat. No, that’s we found a different bulk for our return trip. But for for leaders right now, I think from a tactical standpoint, it just a measure, measure your programs with quantifiable metrics. And you’re probably like, Oh, I’m already doing that. And you probably are. But do it better measure your diversity statistics, your pay equity, your your engagement, turnover, your promotion statistics, but not just at a high level, but understand your trends by location, by department, by gender, by racial diversity, and look to see how they’re shifting over time. And this just data is very powerful. And to see trends is important. And you can even measure your employees engagement. Yep, if you want to ensure you before, you weren’t able to do so as effectively, but we ain’t got a human sustainability index that does exactly that. So with all this measurement and all this data, this is going to allow you to assess if you’re a company that’s in, in the unfortunate position of maybe you have to do a reorganization or or a layoff or or maybe you’re expanding maybe it’s a good thing, and you’re you’re growing. But all of this data is going to help you understand how your metrics are shifting over time. And then you’re going to be better prepared for your pending public disclosures to if the SEC requires more of that data.

David Drapkin (Boardroom Alpha)
Yeah, get ahead of it.

Aria Glasgow (AON ESG Practice)
Yeah, totally. Yeah, to get ahead of it, because that that’ll be important. And then for that, so that’s kind of short-term and then long-term if we think of like measuring long term risk, right, and getting back to that human capital risk and make playing the long game and what do you need to do as a leader, as a board member having oversight to make sure that your your employees are, are engaged. And they’re thriving. And you know, I think this, this starts with compensation, like competitive compensation and benefits. But that’s kind of that’s kind of table stakes, right? You need to have that and we get a lot of questions about like, Okay, well, we’re, we’ve got all this inflation, do we give everybody 10% increases? Well, no, it’s, it’s being more targeted with your dollars. But beyond that total rewards, just to get your employees like to stay right. And because that’s what you want. It’s things that may not cost money. It’s things like doing more meaningful work, which everybody says like, okay, yeah, let’s do the work the work, but maybe it’s it, maybe it’s different work, maybe people just need just to change if it’s a rotation program, if it’s new assignment. A lot of times, it’s having a career path. So employees don’t need to look to move up to the competitor, they can do it right there. But, you know, a lot of a lot of companies don’t communicate that until it’s too late. And then that’s working for supportive managers, so that employees can work for a company where their, you know, their values are aligned.

David Drapkin (Boardroom Alpha)
And when you say values?

Aria Glasgow (AON ESG Practice)
Yeah, no, I probably should have started with that. Because that’s, that’s, that’s a good, good question. And the way I think about it is, you’ve got you there’s lot of data out there that show that employees are looking at companies when they’re making hiring decisions, or when they’re making decisions to move to a new new company. Or, even their current current company, around what wow’s their company showing up when they address things like sustainability? Like their social programs? Like climate? And in what do they disclose publicly on that? And in fact, we just did a survey AONs global DEI survey that showed that there was an incredibly strong correlation between having engaged employees. So how engaged your employees were, and those companies that had a stated diversity, equity and inclusion program, which I thought was just so powerful. So what do you think of values, it’s it aligned to your company’s purpose, and their social responsibility programs. And this again, could get things like, you know, having a DI program, hopefully everybody has one right now. But again, like it, you can’t just say you have it without doing things like what are you really doing to show? Yeah, yeah, what are you doing? And it’s things like, you know, we have a lot of companies where their clients are asking for things like climate education, or maybe it’s a new employee resources group to foster that sense of inclusion and belonging for smaller populations, or could be things like giving more we’ll have more well being time. And, you know, this, it’s these types of value different programs that they help to make sure that like your your workforce sticks, and they’re, they’re staying engaged and they’re productive. And you’re contributing to your overall company performance, and which ultimately gets us back to how how to manage your your overall human capital risks.

David Drapkin (Boardroom Alpha)
Yeah, well, it’s new world, right. Hey, Aria I really, really appreciate you shedding insight on the human capital angle. I think it’s one that maybe the more general public that maybe doesn’t think about as much when they when they hear ESG for for however, that makes them react. So appreciate it. Thanks again. Now I want to go skiing.

Aria Glasgow (AON ESG Practice)
Me too. Me too. Well, thanks so much for having me. This was a lot of fun.

David Drapkin (Boardroom Alpha)
Appreciate it.

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