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.

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.

 

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