The Future of Human Capital: Rising on the Agenda

This has been a year of unprecedented uncertainty and upheaval. It has also cemented the materiality of human capital and the importance of examining preparedness for future workplace challenges. Human capital management is a broad ESG issue that captures important and current matters, such as skills development, diversity and inclusion, and employee engagement. It is growing in its importance due to the dynamic and uncertain management landscape. Notwithstanding the shock of the pandemic and the strengthening drive for racial equality, technology, demographics, and globalization are already driving structural change in labour markets.

Beginning the dialogue and working on articulating the problem now is critical to becoming increasingly sophisticated and managing risk in the future. Now is the moment for companies to show that they are doing the long-term planning and analysis required to develop and support the skilled and diverse workforces needed to drive success. The investor community should be aware of the related risks and impacts to their portfolio companies, and the leading role it can play in challenging business to update their people management practices alongside plans to capture benefits.

Human capital on the investment agenda

Human capital remains one of the most significant costs of doing business – potentially 50-70% of a company’s operating budget considering salaries, benefits, and other investments in employees[i] – and is directly linked to productivity, innovation, and business success. In his 2019 letter to CEOs, BlackRock chief Larry Fink highlighted the importance of human capital management as an engagement priority providing a strong punctuation mark on the business case for taking care of the people who make up organizations.[ii]

The ESG community has sounded the call for better performance around human capital management. In the past months, we have seen investors reinforcing expectations around support for workers[iii] and the disclosure of health and safety metrics. One example has been in its calls on Amazon to be more transparent in how the company is keeping workers safe during the pandemic.[iv] The disproportionate suffering of people of colour in the coronavirus pandemic alongside the Black Lives Matter movement has also driven demands for improved disclosure of data that could help investors to understand related corporate preparedness.[v]

An analysis of ESG issues raised during the 2020 proxy season highlighted the growing importance of human capital to investors as well as companies.[vi] Among the key investor interests was understanding how human capital is part of strategic long-term value consideration and seeing better diversity disclosures. This growing trend in investor focus on the materiality of human capital was being highlighted as early as 2015 by the Investor Responsibility Research Center Institute (IRRCi)[vii] and continued to be built on with Just Capital’s 2019 analysis of human capital disclosures.[viii] Just Capital’s study of 890 large, publicly traded U.S. companies found that those with more transparent disclosure on human capital policies and practices – such as living wages, work-life balance and benefits, or career development – also reported between 1.2% to 3% higher return on equity. Considering the value of human capital, the time is now to keep pushing this topic on the investor agenda.

The best time to plant a tree…

The saying goes that the best time to plant a tree is 20 years ago, but the second-best time is today. The idea of a pandemic was, until 2020, mostly a scientific theory. As we can see from the shocks felt around the globe, we were not ready. Sustainalytics’ earlier blog noted that pushing companies to look after their employees and actively engaging with the challenges and possibilities inherent in the current crisis can help in managing the uncertainty presented by the future.[ix] While the impact of COVID-19 on human capital is not in dispute – and truly has not finished – investors and their investee companies should look to the crisis for learnings that will help them manage workforces and ideally avoid the kind of deep impacts that have been felt this year.

During the coronavirus pandemic, one stock market analysis suggested that companies that rely less on people have performed better than those who do.[x] It is an analysis that may not be surprising given the circumstances. But it fails to answer the question of what happens to workers who have been impacted by the pandemic and, if companies try to move away from people, what happens to people in the future. Before the pandemic turned the world upside-down, technology, demographic, and globalization drivers were already pointing towards imminent structural changes for labour markets and society creating a changing and uncertain landscape. These drivers have not gone anywhere and the transition is already very much underway. Companies’ risk management agenda must consider what this means for their business and employees, what risks they face, and how to get to a point of readiness. Those leading on answering these questions will be better positioned to compete.

A critical component of the transition will be to successfully manage workers in discovering new opportunities and satisfying the key skills organizations require to implement their business strategy. The World Economic Forum (WEF) anticipates major skills shortages and reskilling or upskilling needs. According to its assessment, the new technologies arriving with the Fourth Industrial Revolution will require reskilling of more than 1 billion people by 2030 and by 2022, and 42% of core skills needed for existing jobs are expected to be different.[xi] McKinsey further states that by 2030, 8 to 9% of jobs will be ones that barely exist today.[xii] While the trend towards technology adoption is a major driver of the transition, not all new skills needed will be digital. Interpersonal skills, such as communication and empathy are in growing demand.[xiii] Investors are on a learning curve to identify leading human capital related practices and disclosures, but statistics such as these drive home the understanding that investee companies need to be considering what it means for their plans now.

We must also be mindful of who might be left behind and ensure that human capital management strategies include or support equally strong diversity, equality, and inclusions strategies. The Organisation for Economic Co-operation and Development (OECD) notes that disadvantaged and low-skill workers are in precarious positions with respect to training and education initiatives.[xiv] Coupled with the existing racial inclusion issues, this transition presents a major risk of reinforcing existing biases at a time when we are beginning to see value from prioritising diversity within organizations.

Strategic engagement

Investors should continue to ask their portfolio companies how human capital is being managed and what plans are being made to ensure that the value brought by people is a strategic asset for years to come. The pandemic was a shock. Demanding clarity, whether by disclosure of strategies, policies, or data, on how companies are preparing for a transition that we can see happening is even more poignant now. Investors have a key role to play in contributing a better society and labour market that can withstand upcoming disruptions and “building back better”, and can leverage strategic engagement as a key tool [xv].  Ensuring that companies are not deterred by the unanswered questions but actively seek to tackle them can be a powerful avenue to positively and proactively influence issuer performance on emerging and collective risks and strengthen their role as a stakeholder. In the current context where one transition comes on the back of another, this can not be overlooked.

Matthew Barg is leading Sustainalytics’ Human Capital and the Future of Work thematic engagement, which aims to strengthen target companies’ strategic human capital management and resilience to disruptions in the face of technological and demographic changes, also incorporating lessons learned from the COVID-19 pandemic.  To find out more information regarding Sustainalytics’ Thematic Engagement or its wider Engagement Services, please contact us here.

Sources:

[i] Ono, A. (17.04.20), “Employee Engagement as Part of Your Risk Management Strategy,” Resolver, accessed (02.09.20) at https://www.resolver.com/blog/employee-engagement-part-risk-management-strategy/
[ii]  Fink, L. (2019), “Larry Fink’s 2019 Letter To CEOs: Profit & Purpose,” BlackRock, accessed (24.08.20) at https://www.blackrock.com/americas-offshore/2019-larry-fink-ceo-letter
[iii] Interfaith Center on Corporate Responsibility (2020), “Investor Statement on Coronavirus Response,” Interfaith Center on Corporate Responsibility, accessed (25.08.20) at https://www.iccr.org/investor-statement-coronavirus-response
[iv] Goldberg, D., Godlewski, S., and Frerichs, M. (04.06.20), “Amazon Must Disclose the COVID-19 Impact on Its Workers,” Responsible Investor, accessed (25.08.20) at https://www.responsible-investor.com/articles/amazon-must-disclose-the-covid-19-impact-on-its-workers
[v] Nauman, B. (27.07.20), “US investors demand data in fight against racial discrimination,” Financial Times, accessed (25.08.20) at https://www.ft.com/content/1dffac98-fd4e-4288-8683-8f84e236d335
[vi] Klemash, S.W., Doyle, R., and Smith, J.C. (23.08.20), “Four ESG Highlights from the 2020 Proxy Season,” Harvard Law School Forum on Corporate Governance, accessed (24.08.20) at 2020, https://corpgov.law.harvard.edu/2020/08/23/four-esg-highlights-from-the-2020-proxy-season/
[vii] Bernstein, A. and Beeferman, L. (04.19), “The Materiality of Human Capital to Corporate Financial Performance,”IRRC Institute, accessed (25.08.20) at https://lwp.law.harvard.edu/files/lwp/files/final_human_capital_materiality_april_23_2015.pdf
[viii] Just Capital (04.19), “The Win-Win of Just Job,” Just Capital, accessed (24.08.20) at https://justcapital.com/wp-content/uploads/2019/04/Win-Win-of-JUST-Jobs-Report_041619.pdf
[ix] Kaasinen, T., Barg, M., and Figallo, E. (17.04.20), “Coronavirus: Human Capital Management During and After the Pandemic,” Sustainalytics, accessed (28.08.20) at https://www.sustainalytics.com/esg-blog/coronavirus-human-capital-management-during-and-after-the-pandemic/
[x] Ponczek, S. (25.08.20), “Stock Market Warns Workers That They’re the Problem for Business”, Bloomberg, accessed (25.08.20) at https://www.bloomberg.com/news/articles/2020-08-25/stock-market-warns-workers-that-they-re-the-problem-for-business?sref=wv7TMTgY
[xi] Zahidi, S. (22.01.20), “We need a global reskilling revolution – here’s why,” World Economic Forum, accessed (20.08.20) at https://www.weforum.org/agenda/2020/01/reskilling-revolution-jobs-future-skills/
[xii] Manyika, J., Lund, S., Chui, M., Bughin, J., Woetzel, J., Batra, P., Ko, R., and Sanghvi, S. (28.11.17), “Jobs lost, jobs gained: What the future of work will mean for jobs, skills, and wages,” McKinsey Global Institute, accessed (20.08.20) at https://www.mckinsey.com/featured-insights/future-of-work/jobs-lost-jobs-gained-what-the-future-of-work-will-mean-for-jobs-skills-and-wages
[xiii] Rainie, L. and Anderson, J. (03.05.17), “The Future of Jobs and Jobs Training”, Pew Research Center, accessed () at https://www.pewresearch.org/internet/2017/05/03/the-future-of-jobs-and-jobs-training/
[xiv] Organisation for Economic Co-operation and Development (2019), “The Future of Work: OECD Employment Outlook 2019,” Organisation for Economic Co-operation and Development, accessed () at https://www.oecd.org/employment/Employment-Outlook-2019-Highlight-EN.pdf
[xv] Kaasinen, T. (17.08.20) “Building Back Better for the Next Normal,” Sustainalytics, accessed (28.08.20) at https://www.sustainalytics.com/esg-blog/building-back-better-for-the-next-normal/