COVID-19 has illuminated shortcomings in how some workers are treated, leading some asset owners to look at including employee management considerations as part of their investment strategies.
Asset owners, by and large, already include employee considerations, dubbed "human capital," as part of their ESG company engagement efforts and many view it as a potential risk to portfolios. But more recently, institutional investors, including CalPERS and CalSTRS, are contemplating whether to go beyond environmental, social and governance and devise an investment strategy with human capital management at the forefront.
CalPERS highlighted the issue at its July off-site education sessions, held in advance of its 2021 asset-liability study.
"There's a strong correlation between how companies treat their employees and outperformance," said Marcie Frost, CEO of the $396.9 billion California Public Employees' Retirement System, Sacramento, at the board's July 13 meeting.
Asset owners say human capital management has taken on renewed significance for public and private equity-backed companies in light of growing protests following the killing of George Floyd that have highlighted the lack of diversity in companies' upper management and on boards. The global pandemic as well has revealed workforce issues, including employee reports of difficulty in getting protective equipment, said Anne Simpson, CalPERS' interim managing investment director, board governance and sustainability, in an interview.
"What is new ... is the recognition of our board and the understanding of the urgency in making progress at a faster pace," Ms. Simpson said.
Human capital was developed as a term several years ago to reflect the importance of a company's workforce as one of its assets rather than a cost, which is how company executives have traditionally considered employees, said Cambria Allen-Ratzlaff, co-chairwoman of the Human Capital Management Coalition, an organization of 29 global asset owners representing more than $4 trillion in assets.
Human capital management includes everything from hiring and retention, fair labor practices and health and safety considerations to ethics and diversity, she told the CalPERS board on July 13. CalPERS is a founding member of the coalition. Mary Morris, investment officer at the $246 billion California State Teachers' Retirement System, West Sacramento, is co-chairwoman.
"We're interested in this issue not because it's a social pursuit or an effort to push our personal views … it's because we view them (the workforce) as absolutely fundamental in allowing companies to compete in an environment where ingenuity and the ability to quickly adopt novel technologies are the keys to their lasting success," Ms. Allen-Ratzlaff said.
Information on human capital management is important to asset owners' investment decision-making process because workforce management "is critical to building and protecting company value over the long term," she added.
At CalSTRS' July 15 investment committee meeting, board member and California Controller Betty T. Yee suggested the board consider including human capital in its investment strategy.
In light of workers losing their jobs in a number of industries, Ms. Yee questioned whether "CalSTRS should take a leadership role rather than rely on partners" and use workforce management to inform CalSTRS' investment decisions.