Human capital on the investment agenda

The subject of the pandemic and its widespread impact across the three pillars of ESG is a common topic within our news and insights. While social and governance challenges emerged immediately with the outbreak, “the forced stop in a wide range of activities may have led many to realise that environmental action was more feasible than previously thought”, a finding revealed by GlobalData’s ESG Strategy Survey earlier this year. Coronavirus served as a catalyst for ESG action, positioning it as a critical topic for companies across the globe.

As Blackrock’s Larry Fink surmised in his 2022 letter to chief executives, “No relationship has been changed more by the pandemic than the one between employers and employees”. The unprecedented upheaval to ‘business as usual’ cemented the value of employees as advocates or “assets”, and an invaluable resource when it comes to firm performance, resilience, and ultimate success. Policymakers, boards and executives realised the necessity of robust ESG metrics, and a model to organise and govern them. The implications are twofold; firstly, organisations can use these as a guide as they strive to achieve a positive impact on society and the environment. Secondly, it enhances long-term business performance, mitigates risk and therefore creates value.

Defining Human Capital Management

Human capitial management (HCM) is the economic value that comes from worker’s experience, skills, knowledge, and abilities. It can be measured and developed, and delivers a return on investment (ROI). This covers employee-related matters, including workforce training, compensation, turnover and retention, health and safety, gender pay equity, diversity and inclusion, and corporate culture. One of the biggest business costs  – potentially 40-60% of a company’s operating budget (considering salaries, benefits, and other investments in employees), HCM is directly linked to social well-being, equality, increased productivity and improved rates of participation. 

Willis Towers Watson’s Human Capital Value and Risk Model Image: Willis Towers Watson
Why HCM is an ESG matter

Stakeholders, including investors, policymakers, consumers and employees increasingly demand better performance in this area. There is growing interest in how organisations work with staff to maximise professional benefits, embrace a “future-proofed” workplace and on a bigger scale, how companies can support a fairer and more diverse society. Indeed, adapting to the circumstances of the pandemic forced many workers and investors to consider what the future of work looks like. Reports of the ‘great resignation’ signalled the huge number of employees reassessing their values and priorities, wanting to work for companies more in line with their values and greater sense of purpose. The full impact of this has not yet materialised – earlier this year accounting giant PwC found that 18% of workers said they “are very or extremely likely” to switch jobs in a year to seek better pay and job satisfaction.

Regulatory developments

The human capital metrics requirements announced by the U.S. Securities and Exchange Commission (SEC) in 2020 were a direct result of this change. It became mandatory for all publicly listed companies to disclose information about financial position, their workforce, the way they conduct business, and if they have the necessary human resources to navigate future challenges. Though the rules were criticised for being open to interpretation, more explicit and expanded guidelines are imminent. As with all other components of the ESG landscape, disclosure regulations are continually evolving. 

Why ESG disclosure matters

As society’s focus sharpens on social and environmental issues, employees and investors alike are looking for responsible businesses with well-defined human capital metrics. Though intangible, company culture is now acknowledged as essential in attracting, retaining, and motivating people. Fund managers must engage with portfolio companies to understand how human capital is being managed and what strategies are in place to ensure that the value brought by people is a strategic asset for years to come.

While organisations await expansion and further clarity in the shape of updated disclosure rules from the SEC, one thing seems likely; tighter regulation worldwide will follow growing interest in human capital. Prepare to demonstrate your commitment to advancing diversity, equity, and inclusion.

Be ESG ready

Automation and cross collaboration are key to ESG reporting success. SI Engage is an intuitive, scalable, cloud-based system with a SaaS delivery model that means no expensive hardware, regular software updates, reliability, remote access and shared databases. The system facilitates the gathering and reporting of data in a way that tells a company or fund’s story and resonates with investors. Streamlining your approach to track human capital management, and indeed wider ESG activities, will ensure smoother workflow, more meaningful conversations and sustainable financial returns.

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