Categories
ESG
Measuring the value of human capital
Matt Lanstone
Head of ESG Research and Investing
Emma Doner
ESG Senior Manager
KEY TAKEAWAYS
  • Human capital may be among the largest drivers of value creation, growth and competitiveness among companies — and one of the least transparent.
  • We have identified five human capital indicators that we believe provide an effective way to measure and report on this area.
  • There are three secular trends that underscore the growing materiality of human capital and make the need for measurement increasingly clear: persistent inequality, changing workplace preferences, and the need for innovation and new skills.

Human capital refers to skills, knowledge and experience possessed by an individual or population, viewed in terms of their value or cost to an organisation or country. Within our Environmental, Social and Governance frameworks, human capital is identified as one of the largest drivers of value.


The importance of human capital


In our analysis of companies, we see several clear areas where human capital can have a material effect on financial results:


  • Attracting, developing and retaining the right people
  • Supplying sufficient training for workers to take on new skills and technologies
  • Building diverse, innovative, purpose-driven cultures
  • Maintaining positive labour relations and preventing strikes and stoppages

Five essential indicators to measure human capital


We believe there are five indicators that enable companies to effectively measure and report on human capital management. We consider these to be the most valuable to investors and most reasonable to report across all industries and countries.


Quantitative data is critical to helping us differentiate companies, understand risk and opportunity and ask evidence-based questions to management. From that foundation, qualitative data, either disclosed in company reporting or shared through dialogue with management, can provide context.


High importance, low disclosure


Despite the importance of human capital, very little information is currently disclosed by companies. We measured the level and consistency of human capital disclosure within sectors and regions and found gaps that are largely driven by regulation. Last year, the U.S. SEC ruled on modernizing how companies report on business, legal and risk factors, including a specific new requirement to report information on human capital management, but did not include detailed guidance. 1 So there may be little change in what companies currently disclose. Poor, inconsistent disclosure could mean that human capital is undervalued by the market.


Without this disclosure, it is more difficult to understand elements like minimum wage, median wage and productivity, and to determine the impacts from upward wage pressure or increased competition for talent. Other major reporting gaps are around areas such as diversity, employee turnover and investment in skills and training.


Human capital indicators are sparsely, inconsistently reported among MSCI World constituents

Source: Bloomberg and Capital Group. As of March 2021.

At a sector level, information technology, health care and consumer discretionary provide the lowest and most inconsistent human capital disclosures. These sectors also face material human capital risk. Within IT, for example, companies face intense competition for talent, and widespread attrition can negatively impact growth. Conversely, innovative cultures (supported by diverse teams) can build a competitive advantage. Health care companies rely on an engaged, productive workforce for higher patient satisfaction and better outcomes. Consumer discretionary sectors, with a high share of hourly wage workers, can face sudden cost increases due to regulatory change or industry pressure. Companies unable to pay a competitive living wage without significantly reducing profit margins are under pressure.


 


1. U.S. Securities and Exchange Commission, “SEC Adopts Rule Amendments to Modernize Disclosures of Business, Legal Proceedings, and Risk Factors Under Regulation S-K,” news release. August 26, 2020.


 

Risk factors you should consider before investing:
  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Matt Lanstone is a global head of research and investing in ESG with 28 years of industry experience. He holds a first class bachelor’s degree in economics and accounting from the University of Bristol.

Emma Doner is an ESG senior manager with 8 years of industry experience. She holds an MBA in finance & sustainable development from ESLSCA in Paris and a bachelor’s degree in international business management from Missouri State University.


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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.