By Tim Smithies1 and Dr Ian C Dunican2
1 Scientific Adviser, Melius Consulting.
2 Chief Adviser, Melius Consulting.
Over the last few decades, companies have aimed to develop and improve their approach to environmental, social, and governance issues (also known as ‘ESG’). As part of this, ESG reporting has steadily increased and is considered a vital component for demonstrating the overall value of a business.
For example, roughly 20% of S&P 500 companies reported on ESG in 2011, while over 90% of these companies now publish ESG reports and data in some form. Additionally, 77% of ASX 200 companies report on ESG-related issues, with this number, and the scope of the ESG reporting, growing by the year. These increases in reporting for ESG are for a good reason, as this information is considered of immense importance in the context of socially responsible investments (SRIs) and is an important indicator of company sustainability. In terms of reporting, Xie and colleagues (2019)  found that the disclosure of ESG activities at the ‘moderate’ level provided the best level of corporate efficiency, while Hoepner and colleagues  reported that engagement with ESG issues could reduce risk. Given the continual need for companies to report on ESG-related topics and the business benefits of doing so, it is in the best interests of the modern company to take steps where feasible to provide benefit (or at the least, reduce harm) in each of the three pillars of ESG.
For industries that demand non-standard work hours, 24/7/365 operations, and those that involve safety-sensitive processes (i.e., aviation, transport, mining, oil and gas, healthcare), managing the social pillar of ESG is of importance. Furthermore, within the social pillar, health and safety, specifically managing fatigue risk, is vital in such industries. The management of fatigue risk can be treated with a Fatigue Risk Management System (FRMS). In figure 1 an example of sub elements within the framework can be seen and how an FRMS can be mapped to these.
So, what are Fatigue Risk Management Systems?
An FRMS is a documented system implemented to reduce the risk and frequency of fatigue-related workplace incidents. Fatigue Risk Management Systems are based on systematically identifying fatigue-related workplace hazards. It is the identification and treatment of risk. Examples include predictive mathematical modelling of fatigue for work scheduling, proactive fatigue monitoring in the workplace, and reactive post-incident follow-up. An FRMS runs on the knowledge that human biological factors drive fatigue risk, so managing these human factors is paramount. A good FRMS
- Ensures compliance with the regulatory body/ bodies,
- Describes how to define and measure risk, plans to avoid, and mitigate risk, and the effectiveness of these plans,
- Describes how the FRMS will be promoted to employees, and
- Describes how to measure its performance. While ensuring compliance with regulatory bodies on issues such as shift/ duty, the primary goal of FRMS is to optimise operation by minimising both the frequency and severity of fatigue-related incidents.
So, how exactly does FRMS fit into an ESG framework?
How can an FRMS favourably impact ESG, and can these benefits be included in an ESG report? The answer is a resounding yes. The impact of an FMRS is specific to the ‘social’ pillar of ESG. While these pillars can be broken down differently depending on the ESG framework, here we will discuss FRMS in the context of the framework provided by the Hong Kong Stock Exchange’s ESG Reporting Guide. Here, the most evident aspect is Health and Safety (regardless of the ESG framework, health and safety will be covered under the social pillar). This aspect states that ESG reporting must
- Comply with relevant laws and regulations regarding work environment safety and occupational hazards,
- Discuss the reporting of policies in place about work environment safety and occupational hazard, and
- Describes the health and safety measures adopted, their implementation, and their monitoring.
- Address health and safety concerns specific to worker fatigue,
All of the above is captured within an FRMS with the earlier-mentioned components; hence, the presence of an FRMS is of obvious advantage when reporting on this aspect of ESG.
At Melius Consulting, we have developed an FRMS diagnostic tool  to diagnose against 14 elements that make up an FRMS (Read the full paper here https://www.sciencedirect.com/science/article/pii/S2093791122001287). The diagnostic results are used to develop targeted improvement plans to improve or develop an FRMS for the business. Using a combination of quantitative and qualitative data, the development or improvement of an FRMS may be used in your annual ESG reporting to demonstrate how the business is enabling safe and effective operations that maximise returns through increased productivity and cost reduction. We have conducted such work in mining for companies including BHP, Anglo Gold Ashanti Australia, and South 32 and oil and gas companies such as Fugro, Woodside and Easternwell and in aviation with CHC helicopters.
Contact us to discuss how FRMS can support your business to enable safe and effective operations that maximise returns, increase your ESG ratings, and potentially reduce insurance premiums.
- Hoepner, Andreas G. F. and Oikonomou, Ioannis and Sautner, Zacharias and Starks, Laura T. and Zhou, Xiaoyan, ESG Shareholder Engagement and Downside Risk (December 27, 2021). AFA 2018 paper, European Corporate Governance Institute – Finance Working Paper No. 671/2020, Available at http://dx.doi.org/10.2139/ssrn.2874252
- Xie, J. et al., Do environmental, social, and governance activities improve corporate financial performance? Business Strategy and the Environment, 2019. 28(2): p. 286-300.
- Maisey, G., et al., Fatigue Risk Management Systems Diagnostic Tool: Validation of an organisational assessment tool for shiftwork organisations. Safety and Health at Work, 2022.