The combination of the pandemic, global #MeToo movement, and widespread protests for racial justice have accelerated the expansion of boards’ oversight and consideration of Human Capital Management (HCM). HCM is the set of practices a company uses for recruiting, managing, developing, and optimizing employees to increase their value to the company.

Recent amendments to U.S. Securities and Exchange Commission (SEC) disclosure rules further reinforce the focus on workers. Indeed, in 2020, the largest increase in ESG disclosures came in HCM. HCM issues can have far-reaching consequences for companies, resulting in reputational and financial risks, and regulatory and investor focus on HCM will likely continue.

New Human Capital Disclosure Requirements

SEC Amendments

• On August 26, 2020, the SEC amended Regulation S-K to require public companies to include a description of their human capital resources in the Business section of their annual reports on Form 10-K to the extent material to an understanding of the business taken as a whole. Under the new rules, public companies are expected to include the human capital measures and objectives that the company focuses on in managing the business (including measures and objectives that address the development, attraction, and retention of personnel).

Nasdaq New Listing Rules

• Nasdaq has submitted a proposal to the SEC seeking approval of new listing rules to advance board diversity and increase transparency to investors regarding the diversity characteristics of Nasdaq-listed company boards. The proposed Rule 5605(f) would require each Nasdaq-listed company to have, or explain why it does not have, at least two “Diverse” directors, including (a) at least one director who self-identifies as female; and (b) at least one director who self-identifies as an Underrepresented Minority, or as LGBTQ+.

Human Capital Reporting Strategies

As the importance of human capital is increasingly recognized, so is the need for companies to report on how they maximize its benefit. The SEC disclosure requirement does not define the term “human capital”, opting instead to say that companies should disclose a meaningful qualitative and quantitative disclosure “that address the development, attraction and retention of personnel”.

In the absence of clear guidelines, companies should see this as an opportunity to strategically disclose on HCM by focusing on strategy and key drivers:

1. Know your audience:

   • Assess different aspects of HCM efforts and creatively tailor unique performance goals to the company and stakeholders.

2. Protect yourself:

   • Choose metrics bearing litigation risk in mind. Present a balanced view and thoroughly review your HCM disclosure to avoid potential litigation.

3. Tell the story:

   • Stories that flush out your company’s ESG roadmap highlight process-oriented goals, rather than results-oriented goals.

4. Consider the whole system:

   • Consider inputs and activities and outputs and outcomes associated with human capital throughout the entire company.

5. Add context:

   • Highlight the intersection of your company’s HCM related programs with UN Sustainable Development Goals or initiatives and participation in industry HCM related initiatives.

6. Take care drafting disclosures:

   • Keep in mind that HCM disclosures fall under increased scrutiny and can meaningfully benefit the company.

Reporting Frameworks Focusing on HCM

There are several commonly used reporting frameworks focusing on HCM, including the Sustainability Accounting Standards Board (SASB) metrics, the Global Reporting Initiative (GRI) Standards, and the Social and Human Capital Protocol (as put forward by the Human Capital Management Coalition, HCMC).

While complementary, the two leading frameworks, GRI and SASB, cover HCM topics differently, the reason being that SASB and GRI fulfill different purposes and are based on different approaches to materiality. SASB Standards focus on ESG issues expected to have a financially material impact on the company, aimed at serving the needs of most investors. GRI Standards focus on the economic, environmental, and social impacts of a company in relation to sustainable development, which is of interest to a broad range of stakeholders, including investors. Thus, many companies report both SASB and GRI standards to meet the needs of their audiences. It is worth noting that the GRI standards are standardized across all industries, whereas the SASB metrics are industry-specific, meaning different industries have different HCM metrics.

SASB identifies three categories related to HCM:

• Employee Health & Safety

• Labor Practices

• Employee Engagement, Diversity & Inclusion

  • Currently, 13 of the 77 industry standards address diversity and inclusion via disclosure topics that address the industry-specific, financially-material impact of this issue

GRI standards related to HCM:

• Employment

• Labor-management relations

• Occupational health and safety

• Training and education

• Diversity and equal opportunity

• Non-discrimination

• Freedom of association and collective bargaining

• Child labor

• Forced or compulsory labor

• Security practices

• Rights of indigenous people

• Human rights assessment

Examples of how GRI and SASB differ can be seen in the table below.

If you are interested in learning more about how to strategically integrate and report on your company’s HCM issues, please contact us or call (800) 508-8034 to speak with one of our Sustainability consultants today.

Blog Author

Becky Twohey, Ph.D.
Senior Sustainability Analyst
KERAMIDA Inc.

Contact Becky at btwohey@keramida.com.