It is often stated that employees are the greatest assets of companies, but this is hardly reflected in their reporting. Investors are now provided with substantial and often regulated information on governance matters. Greater awareness of climate change issues meanwhile has led to a necessary increase in environmental disclosures. Within the ESG acronym of environmental, social and governance matters, the S remains the least developed area in reporting, the missing piece.
The workforce is a key stakeholder for companies. A growing body of evidence shows that human capital management is financially material. Understanding the role human capital plays in the performance of companies will help them in the long term and provide them with insights into the drivers of their growth.
Against a background of increasing inequalities in society and automation in the workplace, it is equally crucial for companies to be able to assess their impact on their workforce and on the societies in which they operate. After all, human capital management underpins the UN Sustainable Development Goal 8 of Decent Work and Economic Growth.
However, measuring the impact of investment in human capital is challenging. So is the collection of relevant and reliable data. According to the International Integrated Reporting Council (IIRC), regulatory requirements are limited, while demand for this information from investors, at least mainstream ones, has traditionally been muted. It also says that there is a lack of consensus on how to measure human capital. This has resulted in limited qualitative and quantitative reporting and difficulties in comparing how organisations are maximising the productivity, creativity and general value of their workforce.
Different groups of investors and other stakeholders have launched initiatives to address this challenge. For instance, the World Business Council for Sustainable Development has launched the Social and Human Capital Protocol. The Human Capital Management Coalition in the US, meanwhile, is trying to raise awareness of human capital management as a key element to a company’s long-term performance.
In Europe, the Workforce Disclosure Initiative (WDI) led by ShareAction and funded by the UK’s Department for International Development, has built on the work of the country’s Pensions and Lifetime Savings Association. The initiative brings institutional investors and other key stakeholders together to develop relevant and comparable workforce reporting for listed companies.
Interestingly, the WDI’s proposals go beyond the company’s own direct workforce to include the supply chain. It thus provides an effective framework for companies to respond to challenges set by new regulations such as the UK Modern Slavery Act, the California Transparency in Supply Chains Act and the French Duty of Care Law.
Overall, human capital is receiving more attention from investors and companies. This is driven by different strategic concerns about ethics and culture, the search for talents and skills in a changing environment but also by wider corporate social responsibility.
Building a framework for meaningful disclosure of human capital information is therefore essential. And a standardised set of data to enable comparison with peers and over time, as well as additional reporting relevant to company circumstances, are the bedrock of informed strategic meaningful decision-making, for boards and investors alike.
As this issue becomes more pressing, stakeholder initiatives can help inform practices globally, hopefully keeping regulators at bay and providing the frontrunners in this area with enhanced toolkits to support long-term sustainable growth.
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