Starting November 2020, publicly-traded companies in the U.S. are required by U.S. Securities and Exchange Commission (SEC) Regulation S-K to disclose information on the impact of human capital on the company’s performance. Where human capital is considered material to the business and its performance (which is the case for most companies), the disclosed information should include details for each area of talent management deemed material (i.e. talent attraction, talent development, talent retention, productivity).
These new rules require a significant change in what and how the majority of U.S. companies report on human capital today.
Here are five key reasons why companies need to act now:
Compliance liability exposure
Risk falling behind leading ESG companies
Mounting pressure from institutional and ESG investors
Leadership in adopting global standards
Potential new requirements in the near future
#1. Compliance Liability Exposure
With the SEC’s new human capital disclosure requirements, companies will have to go beyond adding a couple of HR metrics to their earnings reports. Because the SEC did not provide specific metric guidance on which metrics to include in reporting, companies will have to select the “right” human capital metrics and explain how the results support the company’s narrative on its business strategies.
As with traditional financial statements, companies should seek third-party verification from an independent external source on the accuracy of their chosen HR metrics prior to including them in public reporting as well as verification as to whether the metrics chosen add value or add confusion and risk. All of this must be done when the new human capital requirements become effective in November of 2020.
We recommend companies go through a 5-step human capital reporting compliance process to validate their numbers and develop the storylines that link disclosures to business intent. You can learn more about this process here.
#2. Risk Falling Behind Leading ESG Companies
Leading ESG companies such as Allianz, Edwards Lifesciences, and Samsung among others have been including more human capital metrics in their sustainability reports in recent years. Examples are included below.
Allianz – 2018 People Fact Book
Edwards Lifesciences – Sustainability Report
Samsung – Sustainability Report
In addition, socially conscious investing continues to gain momentum even amid the COVID-19 crisis and spreads beyond small and specialty funds. According to a recent survey, the number of global ESG-data driven investment assets has doubled in the last four years surpassing $40.5 trillion in 2020. Here are some notable facts about ESG investing:
The number of ESG consideration funds has grown to 564 funds in 2019
Many large institutional investors like CalSTRS and CALPERS have been advocates for more transparency around human capital reporting disclosure
ESG index funds hit an all-time high at $250 billion
Together with the growth in ESG reporting and social investing, the new SEC disclosure requirements provide companies with a big incentive to disclose more detailed HR metrics and more fully explain the role of human capital in achieving their business goals.
#3. Mounting Pressure from Institutional and ESG Investors
Large institutional investors have been a strong supporter of human capital disclosure leading up to these new rule changes.
One of the leading voices is Human Capital Management Coalition (HCMC). Launched in 2017, HCMC is a group of 32 global institutional investors with over $6 trillion in assets under management created to advocate for better human capital management practices and disclosure. HCMC is co-chaired by the UAW Retiree Medical Benefits Trust and the California State Teachers' Retirement System (CalSTRS).
In HCMC’s official response to SEC’s Regulation S-K announcement, they stated that “under the new rules shareholders would still face difficulty in obtaining information that is clear, consistent, and comparable in order to make optimal investment and voting decisions. While the rulemaking represents important progress in acknowledging the importance of the workforce, the new rules give public companies too much latitude to determine the content and specificity of the human capital-related information they report.” You can read HCMC’s completed response here.
The trend extends globally. In the U.K., Pensions and Lifetime Savings Association, previously known as National Association of Pension Funds (NAPF), published an extensive whitepaper in 2015 calling for clearer reporting and disclosure around human capital.
#4. Leadership in Adopting Global Standards
Since the SEC did not provide specific guidance on what human capital measures to report there is an opportunity for interested companies to establish industry leadership positions by adopting more transparent global human capital reporting and disclosure standards that highlight their commitment to human capital as a competitive differentiator. There are several sets of human capital reporting standards that companies can look to for guidance.
One globally recognized source is the International Organization for Standards (ISO) and its’ human capital reporting standard 30414:2018. Launched in 2018, the standard contains 59 metrics covering 11 different talent management areas. One benefit of adopting ISO 30414:2018 standards is that an organization can be certified that it has complied. (Information on HCMI’s ISO 30414 certification is available here.)
Other human capital reporting guidelines are also in development. Sustainability Accounting Standards Board (SASB), a nonprofit organization working to develop sustainability accounting standards, announced its Human Capital Research Project in 2019. They will “identify key human capital management issues to set up potential standard-setting activities.”
Most recently, the World Economic Forum released a set of 21 sustainability metrics aiming to make ESG reporting mainstream. People or human capital is among the four central pillars of their recommendations.
#5. Potential New Requirements in the Near Future
The SEC’s Regulation S-K was approved on a 3-2 vote. However, the divergence of votes among the SEC commissioners was more about the lack of specificity in metric requirements than whether or not companies should disclose this information.
SEC Chairman Jay Clayton noted in his statement, “I do expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.”
With the support from SEC commissioners, ESG funds, and institutional investor community, it’s only a matter of time until companies will be required to disclose specific human capital metrics and related information to support the impact of human capital on business performance.
The new SEC human capital disclosure requirements are effective November 2020. Now is the time for public companies to act to determine what to measure and disclose to ensure compliance, and to assess the impact of the reported results on their industry competitive standing.
As much of this will be new to most organizations, there will be a substantial effort required to identify and gather the underlying data and systems necessary to calculate certain metrics and create the storylines to support how these metrics reflect upon business performance.
Here are some additional resources:
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