In August, the SEC amended the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. Probably the most significant change was the enhancement of the disclosure requirement for human capital, a topic that has recently been front-burnered by the impact of COVID-19 on the workforce. The amended rule requires companies to disclose, to the extent material, information about human capital resources, including any human capital measures or objectives that the company focuses on in managing the business. The new human capital disclosure requirement largely reflects the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that is “rooted in materiality.” (See this PubCo post.) To emphasize that the requirement was “principles-based” did not mean that disclosure of vague generalities would suffice. Rather, in his Statement regarding the amendments, SEC Chair Jay Clayton remarked that, while the SEC was not prescribing “specific, rigid metrics,” under the principles-based approach, he did “expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” Although the principles-based approach offers the benefit of flexibility to allow disclosure to be adapted to each company, nevertheless, the absence of any prescriptive element left many companies searching for how best to address human capital disclosure. Now, independent standard-setting organization SASB, the Sustainability Accounting Standards Board, has issued a Human Capital Bulletin that summarizes the elements of the SASB Standards that relate to human capital and provides an overview of selected human capital-related topics and metrics that apply across all 77 SASB industry standards.
According to the Bulletin, “human capital” addresses issues that affect a company’s workforce, and is “one of the most prevalent areas of disclosure across SASB’s 77 industry-specific Standards, appearing in all 11 sectors and the majority of individual industry Standards.” Because human capital-related risks and opportunities can vary across industries, specific disclosure topics for each industry are selected based on “evidence of financial impact and evidence of investor interest.” The Bulletin observes that some relevant aspects of human capital may fall under sustainability dimensions other than “Human Capital,” such as supply chain, human rights and critical incident risk management, making other sustainability dimensions worth a look.
The Bulletin advocates use of the SASB standards as a tool to help companies identify human capital-related disclosure topics and metrics for use in disclosures under the new SEC requirements. Because all of the SASB industry sectors contain human capital-related disclosure topics and performance metrics, companies are advised to begin by looking at the human capital-related disclosure topics and performance metrics in the standards applicable to the company’s industry, but to also consider the standards for other industries with similar characteristics. In the Bulletin, SASB identifies a number of human capital-related topics and metrics and divides them into three groups: Labor Practices; Employee Health & Safety; and Employee Engagement, Diversity & Inclusion. SASB also identifies a number of metrics related to Supply Chain Management, which does not cover direct employees and is comprehended by a different sustainability dimension, but may still be relevant to human capital viewed more broadly.
Labor Practices includes metrics such as percentage of active workforce covered under collective bargaining agreements; number of work stoppages and total days idle; total amount of monetary losses as a result of legal proceedings associated with labor law violations; voluntary and involuntary turnover rate; average hourly wage and percentage employees earning minimum wage, by region; description of policies and programs to prevent worker harassment and percentage of drivers classified as independent contractors. The Bulletin identifies the industry sectors to which each of the identified metrics may be applicable.
Employee Health & Safety includes both physical and mental wellbeing, and incorporates training and culture. The Bulletin identifies as the most commonly referenced Employee Health & Safety metric “total recordable incident rate and fatality rate for direct employees and contract employees.” Some industries, such as fuel cells and industrial batteries, chemicals and semiconductors, “include qualitative, discussion-and-analysis metrics that call for a discussion of the company’s strategy to integrate a culture of safety and/or assess, monitor, and reduce exposure of employees to human health hazards.” There are also a number of highly specialized metrics that relate to specific industries, in some cases identifying specific diseases and conditions that afflict workers in certain occupations, such as chronic respiratory health conditions.
Employee Engagement, Diversity & Inclusion covers disclosure topics associated with “a company’s ability to ensure its culture, hiring, and promotion practices embrace the building of a diverse and inclusive workforce. This includes the issue of discriminatory practices.” Relevant metrics might include, for example, percentage of gender and racial/ethnic group representation for management, technical staff and all other employees; employee engagement as a percentage; voluntary and involuntary turnover rate for all employees; percentage of employees that are foreign nationals (or H-1B visa holders); total amount of monetary losses as a result of legal proceedings associated with employment discrimination; and discussion of talent recruitment and retention efforts for certain personnel, such as scientists, research and development personnel or health care practitioners.
Supply Chain addresses human capital-associated issues that do not relate to direct employees but rather to workers “managed through indirect channels,” thus falling under the Business Model & Innovation sustainability dimension. SASB disclosure topics in this area relate to conduct by suppliers through their operational activities, such as environmental responsibility, human rights, labor practices and ethics and corruption. Metrics identified in the Bulletin include suppliers’ social and environmental responsibility audit non-conformance rate and associated corrective action rate for major and minor non-conformances; discussion of strategy to manage environmental and social risks arising from the supply chain; percentage of products sourced that are certified to a third-party environmental and/or social standard, and percentages by standard; and number of facilities audited to a social responsibility code of conduct.
Beyond the current framework, in light of the increasing interest in human capital and the rapid evolution of issues in this area as a result of emerging trends, in 2019, SASB commenced a Human Capital Management research project to “design an evidence-based framework to support the identification of financially material impacts related to human capital management.” The project is expected to result in new recommendations for possible modifications to industry standards incorporating new elements associated with human capital. Core themes identified so far include:
- Workforce Culture—the “values, processes, and outcomes” of a company can lead to a more “productive, fair, and respectful work environment” and help to attract and retain talent. These issues may fall under “Employee Engagement, Diversity, & Inclusion.”
- Workforce Investment—the efforts of a company to provide employees with career-building and wealth-building opportunities is associated with increased worker engagement and retention, the ability to reskill or upskill workers and improvements to employee performance and productivity. These issues relate to “Labor Relations,” but may also have broader implications.
- Mental Health & Health-Related Benefits—mental health benefits can help worker productivity, especially in light of “the increasing prevalence of stress, depression, and anxiety.” Health benefits such as paid sick leave may affect job turnover, recruitment and retention, productivity and rates of absenteeism. These issues relate to the “Employee Health & Safety” category and may also have more general implications.
- Alternative Workforce (contingent and contract labor)—the growth of the gig economy, independent contract workers and other alternative workforces all have implications for an increasing number of businesses and their workforces, both the employee and the alternative workforces. These issues may be considered within SASB’s general issue taxonomy.
Although these newer concepts have not yet been incorporated into the SASB framework, companies may want to consider addressing some of these topics in their human capital disclosures to the extent relevant.