Today, environmental, social and governance (ESG) issues are even higher priorities for policymakers, boards and executives, accelerated by the geopolitical challenges amplified by the COVID-19 pandemic. Having a robust set of ESG metrics and a model to organize and govern them serves a dual purpose: guiding organizations as they strive to achieve a positive impact on society and the environment, and enhancing long-term business performance and value creation.
We believe that the three factors of ESG are interconnected by human capital. For example, few actions taken under the environmental factor can be achieved without human involvement, and sustained success requires considering the social factor of environmental and governance goals (and vice versa). Leading companies have realised that their people are the strongest advocates and enablers of climate strategy, and thus a key force for change.
Furthermore, numerous stakeholders seek sustainable change, including investors, policymakers, consumers and employees. Over eight out of 10 global consumers expect CEOs to lead on societal issues and the top 500 global asset managers place a premium on the sustainability nexus that links purpose, diversity, equity and inclusion (DEI) and ESG principles, according to Pensions & Investments and The Thinking Ahead Institute’s World’s Largest Asset Managers 2020 report. Meanwhile, research suggests that 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 at a purpose-driven organisation and they are 1.4 times more engaged at work.
Additionally, stakeholders are demanding accountability and transparency on financial exposure to risks, opportunities, governance and fiduciary duty related to human capital. For example, 51% of S&P 500 companies utilized ESG metrics to reward executives in their annual incentives as they entered 2021. Among companies that use ESG metrics in executive incentives, the most prevalent category for North America and Europe is people and HR, which includes metrics such as succession planning, talent development, DEI, employee engagement and culture, according to Willis Towers Watson research.
Efforts to introduce robust standards, principles and metrics to value human capital are also accelerating. 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 Reporting Foundation.
In August 2020, we released Human Capital as an Asset: An Accounting Framework to Reset the Value of Talent in the New World of Work, which introduced the concept of treating human capital as an asset, with associated metrics. A holistic model to oversee human capital across ESG factors yields benefits for a variety of stakeholders, including boards, investors, chief risk officers, and HR and finance leaders. For example, Figure 1 outlines a model which addresses the risks and value derived from human capital across ESG factors through integrated themes such as wellbeing, DEI, employee experience and operational excellence. It organises metrics such as workforce profile, pay, benefits, careers, hiring, retention, productivity, wellbeing and culture, and can be used in conjunction with a variety of human capital valuation methodologies.
The model also reflects how human capital can drive environmental and governance metrics by measuring employee actions in alignment with those objectives. For example, governance and ethical behaviour can include metrics related to whistle-blower policies, unethical behaviour tied to monetary losses, dismissal and incentives against excessive risk taking.
There are several potential human capital management-related ESG metrics, from well-known operational metrics such as productivity per employee or pay gap (e.g., gender, race/ethnicity/national origin, LGBTQ+) to emerging ones such as high-performance employee experience (HPEX) or equitable access to reskilling and upskilling programs. There is also a range of quantitative metrics, from well-known examples such as pay equity ratios, diversity and representation targets, retention rate of top talent and investment in employee upskilling to emerging ones such as Return on Work (RoW) and Total Cost of Work (TCoW), which we explained in last year’s paper. Finally, some metrics cut across categories, such as benefit claims ratio and Total Workforce Value.
The model may be used as a starting point or to validate existing measurement approaches. Organisations generally work to find the right balance of metrics for their specific situations, industry and objectives.
When defining, developing and implementing metrics, leading organisations align them with their overall business strategy, company purpose, and culture, incorporating ESG principles in all three. They choose metrics carefully and abide by principles that already are in use for measuring physical and financial capital, including materiality, relevance and meaning, measurability, reliability, comparability, timeliness, auditability and cost versus benefit.
| Categories | Metrics |
|---|---|
| Wellbeing | |
Ways of working |
|
Healthy work environment |
|
| Diversity, equity and inclusion (DEI) | |
Skills for the future |
|
| Employee experience (EX) | |
Doing great work in thriving organisation |
|
| Operational excellence (OX) | |
Technology to optimise work |
|
Processes to optimise work |
|
| Categories | Metrics |
|---|---|
Work / job framework |
|
Talent segmentation approach |
|
Flexible workplace strategy |
|
Optimal organisation structure |
|
Enablement of innovation |
|
Cost and return of work |
|
By engaging a broad set of stakeholders across an organisation, companies can make substantive changes. Forward-looking companies integrate meaningful ESG metrics into performance expectations and executive incentive plans to drive the relevant human capital priorities.
For example, Mastercard’s initiatives to advance purpose-driven total rewards demonstrates how environmental and social goals can be achieved through human capital. In March 2021, the company announced that compensation for its executives will be tied to ESG goals and specifically to improvements in achieving carbon neutrality, financial inclusion and gender pay parity. They also continuously adapt their total rewards models to address different areas of human capital value and risk, for example, DEI, supporting new ways of working and employee wellbeing.
In an increasingly socially and ethically conscious world, leading organisations put ESG principles at the centre of their human capital management strategies. The added emphasis on organisational and financial sustainability provides opportunities to outperform the market, manage risk and drive shareholder value by successfully meeting the needs of multiple stakeholders.
