This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.
Author: John M. Bremen, Managing Director, Human Capital and Benefits, and Director of Innovation and Acceleration, Willis Towers Watson & Shai Ganu, Managing Director, Executive Compensation, Global Practice Leader and Head of ‘ASEAN and South Asian Talent & Awards Company, Willis Towers Watson and Amy Sung, Managing Director, Talents & Awards, Willis Towers Watson and Matt Wurtzel, Editor, Willis Towers Watson
- Environmental, social and governance (ESG) issues are a growing priority for policy makers, boards of directors and executives.
- Employees are important advocates and enablers of ESG strategies.
- Here is a template for measuring human capital and aligning it with ESG priorities to achieve goals and promote employee well-being.
The geopolitical challenges magnified by the COVID-19 pandemic have made environmental, social and governance (ESG) issues even higher priorities for policymakers, boards of directors and executives. Having a solid set of ESG measures and a model for organizing and governing them not only guides organizations in their efforts to have a positive impact on society and the environment; it also improves long-term business performance, mitigates risk and creates value.
The three components of ESG are interconnected by human capital. Large companies have realized that their employees are the most ardent advocates and enablers of ESG strategy, and therefore a key force for change.
Why human capital is essential for ESG success
Many stakeholders, including investors, policymakers, consumers and employees, are calling for change. More … than eight out of 10 global consumers expect CEOs to lead societal issues, and the world’s top 500 asset managers place great importance on sustainability link which links purpose, diversity, equity and inclusion (DCI) and ESG principles, according to Pensions and investments and the Thinking Ahead Institute The world’s largest asset managers 2020 report. During this time, 58% of employees consider a company’s social and environmental commitments when deciding where to work, and employees are three times more likely to stay and 1.4 times more engaged to what they see as goal-oriented organizations.
These stakeholders also demand accountability and transparency about financial exposure to risks, opportunities, governance and fiduciary obligations related to human capital. For example, 51% of S&P 500 companies used ESG metrics to reward executives in their annual bonuses entering 2021. Among companies that use ESG metrics in executive bonuses, the most common category in North America and Europe is People and HR, which includes metrics such as succession planning, talent development, DEI, employee engagement and culture, according to research by Willis Towers Watson.
Efforts to introduce robust standards, principles and measures to enhance human capital as part of ESG efforts are gaining momentum. For example, the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) announced a merger to consolidate their ESG initiatives by forming the Value Report Foundation.
How to leverage human capital for ESG objectives
As we wrote in the World Economic Forum white paper, in collaboration with Willis Towers Watson, Human capital as an asset: an accounting framework to enhance talent in the new world of work, we must treat human capital as an asset, with the associated metrics. A holistic model for overseeing human capital across ESG factors has benefits for a variety of stakeholders, including boards of directors, investors, risk directors, and human resources and finance managers.
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Human capital can be assessed in areas such as well-being, DEI, employee experience and operational excellence. Measures of human capital include workforce profile, compensation, benefits, careers, hiring, retention, productivity, well-being and culture. Governance and ethics measures related to human capital include whistleblower policies, unethical behavior related to monetary loss, dismissal and incentives against excessive risk-taking.
There are also several ESG metrics related to human capital management, including employee productivity, pay gaps, high performance employee experience, and equitable access to retraining and development programs. There are quantitative metrics, including pay equity ratios, diversity and representation goals, top talent retention rate, investment in employee development, return on investment, and total cost of labor. And there are metrics that cut across all categories, such as claim rate and total labor value.
When defining, developing and implementing measures, organizations should align them with their overall business strategy, purpose and corporate culture, incorporating ESG principles into all three. They choose metrics carefully and respect the principles which are already used to measure physical and financial capital, including materiality, relevance and significance, measurability, reliability, comparability, timeliness, auditability and cost / benefit ratio.
The power to integrate ESG and human capital
Forward-looking companies need to incorporate meaningful ESG metrics into executive performance expectations and incentive plans to make substantive changes.
For example, Mastercard initiatives Advancing Goal-Based Total Rewards demonstrates how environmental and social goals can be enhanced through human capital. In March 2021, the company announced that executive compensation would be linked to ESG objectives and more specifically to improvements aimed at achieving carbon neutrality, financial inclusion and gender pay equity. The company is also continually adapting its total rewards models to address different areas of human capital value and risk, for example DEI, supporting new ways of working and employee well-being.
In an increasingly socially and ethically conscious world, organizations must place ESG principles at the center of their human capital management strategies. The focus on organizational and financial sustainability offers opportunities to outperform the market, manage risk and generate shareholder value.