ESG Considerations in Human Capital Management

One of the distinctive features of a company’s workforce - unlike other forms of business investment such as machinery or equipment - is that employees are appreciating assets. As they gain knowledge, expertise, and comfort in their roles, their value increases over time. We’ve all heard the old saying that ‘an employee is a company’s most valuable asset’, and this is a unique reason why. But employees are also typically the most expensive asset that a company may procure due to compensation, training, and recruitment costs; thus, maximizing the return on investment is paramount to many companies’ success.

As the ESG landscape has continued to evolve, many companies have shifted their attention to maximizing their human capital management (HCM) strategies, and investors in particular are taking notice of those companies creating the most value from their human capital stock. In some cases, events have necessitated actions. The most obvious being the COVID-19 pandemic which forced companies to apply emergency safety measures to protect employees, measures they may not have had in place before. For many companies they learned valuable lessons for improving employee health and safety (EHS) protocols as a result. Additionally, new regulatory requirements are beginning to take shape. The Equal Employment Opportunity Commission, under the auspices of the U.S. Department of Labor, has implemented Employment Information Report (EEO-1) rules to investigate employment discrimination charges, and it requires companies to report their employee demographics data. Even the SEC has drafted disclosure requirements for HCM measures or objectives that are material to publicly traded companies.

Since HCM can cover many different elements of a workforce management culture, companies need to evaluate different areas of development in order to form a comprehensive strategy. Success often depends on providing employees with the best opportunities to succeed. Stakeholders, especially investors, are looking at professional development (PD) and diversity, equity, and inclusion (DEI) programs as integral components of a company's mission. Inclusive companies with positive work cultures can achieve higher workforce retention and productivity rates. ​

As part of an overall ESG program, companies can look to the Global Reporting Initiative (GRI) for guidance. The GRI covers many different ESG topics, HCM being one of them. With input and coordination with other non-profit groups, the first GRI standard was published in 2000 to help companies identify key ESG topics and how to address them. For workforce considerations, GRI identifies the following topics:

• Occupational Health and Safety: Defining an OHS management system that identifies and mitigates risks, creates training and protocols, and the inclusion of worker participation.
• Training and Education: Upgrading employee skills and transition assistance programs and worker participation.
• Diversity and Equal Opportunity: The diversity of governance bodies and employees.
• Non-Discrimination: Incidents of discrimination and corrective actions taken.
• Freedom of Association and Collective Bargaining Rights: Acknowledgement of rights and identifying suppliers whose labor practices can create risks.
• Forced, Compulsory, or Child Labor Prohibitions: Identifying Operations and suppliers at significant risk for incidents of forced, compulsory, or child labor violations.

For some of these topics, legal and regulatory frameworks already exist that require business compliance, such as for forced labor, non-discrimination, and employee health and safety. But in order for companies to maximize value, tailored approaches are necessary for developing PD and DEI strategies. DEI, in particular, requires looking beyond quantitative targets and goals and accentuating positive work cultures that are inclusive of everyone. Younger generations of workers are more diverse than ever, and the companies that succeed at recruiting them can maximize advantages when competing for talent. Although many companies have focused on Board diversity commitments - particularly in publicly traded companies - commitments should be expanded to adequately address advancement at all employment levels, including at leadership and management level roles. Additionally, diverse backgrounds bring varied perspectives and can reduce groupthink.​

Customized professional development and training programs are critical to ensure the equity of success at all workforce levels. And in order to maximize the benefits of these programs for a diverse array of employees, organizations need to take a strategic approach. Strategic training management involves a needs-based analysis to identify necessary skills for each employee, with individual training plans tailored to different circumstances. ​Preferably, individual training plans are designed to accommodate for customized training approaches with training targets, evaluation, and follow-up to ensure achievements are recognized, benefiting both the employee and the company. Where feasible, companies should align career paths with better training and education for high-value business segments, enhancing productivity and operational efficiency while driving employee engagement. Better trained and educated employees are more productive and operationally efficient. Furthermore, it drives employee engagement by including them in a strategy for overall company success.

Companies can designate formal HCM responsibilities through a variety of means such as Board oversight mechanisms or dedicated HCM or sustainability leadership positions. In many cases, companies incorporate HCM goals into executive renumeration programs, especially in industries where employee safety is critical. Assigning formal responsibilities, goals, and incentives for top management are effective means for fostering work cultures that are the most conducive to success.

Ultimately, HCM encompasses many issues that can impact a company's operations. Company leadership must address the interests of a capital class eager to understand the value-add measures being implemented to maximize employee potential. At Aeterra, we have both the in-house resources and expertise to help our clients navigate this landscape. Our Workspace software platform is designed to help our clients aggregate and categorize their ESG data sources. This includes tallying their full enterprise-wide HCM data targets and providing real-time data composite snapshots. Our team of experienced ESG professionals offer a full range of expertise and guidance to ensure the clearest path forward for our clients. We’re here to help and act as a partner to our clients as they work towards a more equitable and sustainable business model.