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How the SEC focus on ESG can boost human capital management

Tyrone Smith Jr. of Udemy
Tyrone Smith Jr.
Author and speaker Tyrone Smith Jr. is the global director, head of people analytics and insights, at Udemy. He is also a self-proclaimed people analytics and future of work enthusiast, innovator and strategist.

Treating employees well hasn’t always been a priority for organizations, but that’s changing. Investors and prospective employees alike are increasingly interested in how organizations work with staff to maximize professional benefits and embrace a “future-proofed” workplace designed to welcome new technology rather than hide from it. Adapting to the global COVID-19 pandemic accelerated the need for change as workers and investors around the world wonder what the future of work looks like—and how today’s employees will react to the coming changes.

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The new human capital metrics requirements imposed by the U.S. Securities and Exchange Commission are a direct result of the impending business revolution. However, relatively few businesses and human resources professionals are heeding the warning. Adopting human capital metrics, with a particular emphasis on the “S” in  Environment, Social and Governance (ESG), can prove to be advantageous for businesses. It’s time for the rest of the human capital, and frankly the global business, community to get on board.

What does the SEC say about human capital?

Since November 2020, the SEC requires businesses to disclose additional details about their human capital. This is a significant addition to their former disclosure requirements. The new guidelines focus on different aspects of human capital management. A key element: Businesses must develop human capital management principles that center around ESG. In practice, they can be used to describe businesses in terms of measuring the business’s human capital in conjunction with such objectives as finding talent, training and growing employees, retaining employees and diversity, equity and inclusion.

The SEC’s pressure on businesses to develop ESG principles reflects the growing commitment of today’s investors to businesses that are socially responsible. In fact, recent research published in PwC’s 2021 Global Investor Survey found that 79% of American investors consider ESG factors important to their investment decisions. Similarly, stakeholders are insisting upon changes in corporate policy that focus on ESG principles, with an emphasis on its social principles. The underlying reason is to protect businesses from social risks and boost long-term business performance. This includes transparency regarding human capital policies and how they align with the evolving business environment. Succession planning, employee culture and engagement, and talent development are a few of the metrics stakeholders want to see in increasing numbers. Additionally, 71% of American consumers actively want to buy from—or engage with—socially responsible companies, an IBM survey shows.

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Why do ESG issues matter?

Issues involving environmental, social and governance are carefully followed today by an increasingly social- and environmental-focused society. Social issues are especially important, with many people focused on addressing social inequalities and differences in order to build a more inclusive environment inside the workplace and in general. This is where the “S” in “ESG” comes into play. Investors, along with current and prospective employees, are looking for socially responsible businesses with well-defined human capital metrics. Both groups are specifically concerned with how individual businesses support their most important resource: employees.

Related: What the growing focus on ESG issues means for CHROs

One of the most striking reasons that focusing on ESG issues and metrics is important, then, is the potential for increased stock market performance. At the same time, prospective and current employees are interested in businesses focused on addressing ESG issues within their workforces. Recent research from PwC found that 86% of employees consider ESG matters important when deciding where to work or which businesses to support. And as talent continues to look to a business’s values and mission to determine whether to join and/or stay, the well-being of organizations—based on their ability to recruit and retain top talent—will become more ESG policy-dependent.

Implementing ESG initiatives

The social aspects of ESG are often overlooked. In truth, they are some of the most important and most challenging ESG elements that corporations can implement.

To put it succinctly, human capital must be considered a benefit. Corporations should strive to craft excellent employee experiences that attract and retain talent. In tandem, they should create programs to weigh the associated metrics accordingly. Willis Towers Watson writes that “human capital accounting” can be measured just like financial capital with the right framework. Finding one that works for your business can help convey new or updated human capital policies to stakeholders via measurement dashboards. Perhaps more importantly, closely measuring human capital social metrics can provide insight into falling morale or a shift in how the workforce perceives their corporate environment.

Detailed data points about ESG initiatives also include human rights policies, which lay the groundwork regarding respecting both indirect and direct employees, as well as diversity, inclusion, and equity policies to ensure businesses have a diverse workforce with adequate representation for underrepresented and disadvantaged populations.

It’s also important to note that ESG policy can take time to implement. That’s why it is important to set clear goals with institutionalized oversight. This ensures that even when the executive team responsible for setting goals leaves, ESG remains a priority. Beyond this, setting the right goals is crucial. Research from the McKinsey Institute has also found that well-defined and outcome-oriented ESG initiatives can lower costs and boost employee productivity and satisfaction, further improving business success and bottom lines.

As the SEC, prospective employees and corporate boards turn their attention more squarely to social responsibility in business, it is never too soon to begin implementing ESG policies or forming an ESG Committee in the workplace—with human capital professionals and the management team taking a leading role. From revenue benefits to improved public perception, the stakes involved in portraying authentic, socially focused corporate values should be at the top of business and human capital priority lists. Because work environments continue to change, it is worth getting in early by creating an ESG strategy now. As global frameworks and standards become more well-defined in the future, these strategies will become critical to corporate success.