Investor demand for companies to disclose how they manage human capital is getting a boost from the events of 2020 and a new project at the Sustainability Accounting Standards Board.
Human capital management "has always been in the background, but not as strong a voice as this year. Investors are saying we want this information, we want disclosure. Companies know that and are trying to figure it out. They are aware that this is on investors' radars, so now they are spending time on how to track and disclose it," said Kelli Okuji Wilson, SASB analyst, sector lead - health care and head of the human capital research project. Launched in January, the project gained greater weight almost immediately due to the COVID-19 crisis and renewed calls for social justice.
The first phase of the SASB project, researching how to assess the respective human capital themes in all 77 industries covered by current SASB standards, is expected to wrap up by mid-2021, followed by an industry heat map and ultimately development of a new standard framework.
Along with determining the materiality of various human capital issues, the project will assess which issues are industry-specific or cut across industries, create key issue categories and produce recommendations for a standard.
SASB developed 77 industry standards designed to evolve along with investors' needs and to connect the measures to corporate performance. SASB also offers a materiality map for the standards that lets users compare disclosure topics in different industries and sectors, an engagement guide for investors and an implementation guide for companies.
Human capital issues are woven throughout the industry standards to address three financially material issues related to human capital management: employee health and safety; employee diversity, inclusion and engagement; and labor practices. However, the relevant standards with those issues only apply to about 60% of industries, while other issues such as labor conditions in the supply chain and human rights are covered in separate SASB standards.
SASB officials are now working to expand human capital management metrics to more industries so that both companies and investors can better measure the financial exposure from those issues. There is strong investor and corporate interest to do that, Ms. Wilson said.
The move to advance disclosure of human capital management is welcomed by the Human Capital Management Coalition, a group of 32 institutional investors representing $6 trillion in assets that is working to elevate human capital management as a critical component in company performance, It is co-chaired by the $60 billion UAW Retiree Medical Benefits Trust, Detroit, and the $257.9 billion California State Teachers' Retirement System, West Sacramento.
"We definitely welcome a standard that many companies can ascribe to because ultimately what we want is measurement," said Rodrigo Garcia, Illinois deputy treasurer and chief investment officer.
"What is measured is managed," said Max Dolberger, director of corporate governance and sustainable investment for the Illinois treasurer, a coalition member.
The Illinois treasurer is the state's chief investment officer actively managing $35 billion, and also a trustee for the state pension funds. A sustainability law that went into effect in 2020 requires all state funds to integrate diversity and inclusion considerations into their investment policies.
The coalition has been pushing for more disclosure of companies' human capital management policies, practices and performance for years, including a 2017 petition to the Securities and Exchange Commission to adopt new disclosure rules or amend existing ones. "There is broad consensus that human capital management is important to the bottom line, and a large body of empirical work has shown that skillful management of human capital management is associated with better corporate performance, including better risk management," the coalition argued in its SEC petition.
Coalition members wanted mandated disclosure on four fundamental metrics: the number of employees including full-time, part-time and contingent labor; total workforce costs; turnover; and workforce diversity, equity and inclusion data, especially among the most senior levels.
However, when the SEC in August amended financial reporting rules, it opted for a principles-based approach on the subject of human capital that coalition members felt left too much to manager discretion and limited investors' ability to compare companies on workforce practices.
The financial reporting rules for disclosing risk factors, known as Regulation S-K, had not been updated in 30 years. The amended rules shifted from a prescriptive approach to a principles-based framework based on an issue's materiality to respective companies. SEC Chairman Jay Clayton was "particularly supportive of the increased focus on human capital disclosures," which depending on the industry or company, "can be an important driver of long-term value," he said at the time.
"We believe consistent and comparable disclosures are necessary in order for investors to properly benchmark companies over time," said coalition co-Chairwoman Mary Hartman Morris, an investment officer within corporate governance at CalSTRS.
Her co-chairwoman, Cambria Allen-Ratzlaff, corporate governance director for the UAW Retiree Medical Benefits Trust, argued that the data are often already collected by the firm, including workforce diversity data reported annually to the Equal Employment Opportunity Commission.
Having the four mandatory metrics is "absolutely necessary for shareholders to make informed investment, voting and engagement decisions," Ms. Allen-Ratzlaff said. The coalition would also appreciate disclosure of workplace health and safety, workforce skills and capabilities, workforce culture and engagement, human and labor rights, and workforce pay and incentives, she said.
Resources like the pending SASB standard would help investors assess the quality of a firm's workforce management and deployment practices, she said.
Scott M. Stringer, the city comptroller and fiduciary of the five pension funds within the $211 billion New York City Retirement Systems, has been pushing for companies to disclose data for racial and gender diversity across job categories that is already required by the Equal Employment Opportunity Commission. His office is also hopeful that their ESG data providers will begin collecting data that allows them to screen and perform comparative and trend analysis.
Derek Butcher, senior ESG analyst for corporate governance and responsible investment at RBC Global Asset Management in Toronto, also expects human capital issues to have a bigger presence next year, as the full impact of COVID-19 sinks in. "For the 2021 proxy season, I can certainly see that translating into shareholder proposals," Mr. Butcher said. In the meantime, he said, "companies are showing a willingness to discuss it."
Among direct engagement, proxy voting and an eventual SASB standard on human capital management, Mr. Garcia of Illinois said, "I would think that the more investors are vocal about what they are looking for, it will develop a standard that works for everyone."