Human capital disclosures are key components of your ESG reporting strategy

Prepare now for potential SEC updates to human capital reporting that could include diversity and inclusion

For many companies, their greatest asset — and one of their biggest costs — is their people. Companies have always competed for the best talent. However, low unemployment, highly visible global social movements, looming regulatory requirements and the rise of hybrid work have led to increased scrutiny from stakeholders about how companies attract, train and retain top talent — and how those practices can drive long-term growth, enhance brand reputation and build trust across the organization.  

What is human capital reporting and why is it important?  

According to a PwC Survey, 48% of consumers said that companies need to do more to advance societal issues, including human capital management (HCM) elements like diversity, equity and inclusion (DEI), hiring practices and fair pay. Leaders are now being called on to provide greater disclosures that can help stakeholders evaluate whether a business has the right workforce to meet both immediate and emerging business challenges. 

As the SEC prepares to propose new rules on HCM disclosure requirements — which were last updated in 2020 — and global regulations ramp up, it is imperative for companies to develop a strategy for collecting, measuring and reporting on human capital data and to track progress over time.

Organizations that are successful in this initiative may potentially be better able to communicate their commitment and progress, increase employee engagement, manage associated risk and check that  their efforts are achieving their goals — while also improving their reputation and gaining greater interest from investors.

Regulatory bodies around the world are increasing the call for companies to disclose information including board diversity representation and DEI program objectives. In some cases, companies must explain in their disclosures why they haven’t met certain regulatory targets related to diversity measures. In 2023, we expect to see proposed updates to the SEC’s human capital disclosure rules.

Common challenges for human capital reporting

When compared to other environmental, social, and governance (ESG) metrics, human capital disclosures aren’t as easily defined, and companies may lack established track records of data that can show impacts over time. In such an environment, companies must overcome four barriers:

Uncertainty regarding how to define HCM

There is often a divide among stakeholders on how to manage and communicate HCM issues. What do terms like diversity and inclusion mean in your company, and how does your employer tackle these important issues? HCM programs are typically managed by HR and often are tracked in a way that may make them challenging to communicate externally — if they are tracked at all. Lack of coordination across HR, IT and accounting/finance (which is often already well-versed reporting to investors and regulators) is commonplace.

Potentially unflattering image of the company

Transparency, coupled with future commitments, drives greater accountability and engagement in the solution across the entire company. Yet many enterprises are hesitant to disclose the details of their HCM metrics because they are uncomfortable with the story the metrics may tell — or may even worry that the metrics could potentially be seen as inconsistent with how the company is perceived externally. Therefore, they may be inclined to defer being transparent until the metrics look better. But transparency and authenticity on HCM issues can go a long way when things don’t go as planned. Leaders should communicate when their companies aren’t where they want them to be, and they should be clear about the steps they are taking to achieve the progress that stakeholders want to see.

Outdated understanding or awareness of HCM issue

Companies may have implemented programs and metrics but failed to update them to keep pace with social movements and changing public consciousness. That means they risk appearing out of step or insensitive regarding certain groups or emerging issues. In organizations that have added initiatives in a reactive way, the array of programs can lack cohesion or a guiding vision or goal.

Struggle to inspire and measure HCM progress

Even with strategy and program changes or enhancements, companies may still struggle to get this right. It is important to recognize this upfront. Progress for HCM may look different than other non-financial ESG metrics, so companies will need to own the fact that progress is not always measurable. Companies should be willing to take a step back, ask tough questions, have thoughtful reflections on how to continue to move the needle in this space and decide what bold actions they can take to have a meaningful impact.

Six steps to transition to investor-grade, tech-enabled reporting

What actions can you take now regarding human capital reporting?

As many anticipate that the SEC will propose updates to its human capital reporting requirements, investors, business partners and consumers are demanding more transparency of companies’ human capital management practices. 

In the past, your company may have been asked solely about its diversity and inclusion program. Currently, stakeholders may also be interested in deeper measures on workforce composition, workforce stability and turnover, the composition of leadership ranks, pay gaps, worker injuries, and/or human rights issues in the supply chain.

The steps to investor-grade human capital reporting are aligned to other reporting processes you may be very familiar with, including climate, cyber, financial, etc. As you prepare for upcoming HC disclosure requirements, we recommend starting with these three steps:

1. Determine HCM reporting strategy

Metrics are important, but they don’t necessarily reveal the full story of your company’s values, what programs you have in place and what efforts you’ve made. An inspiring narrative can bridge this gap. It’s critical to build a narrative around HCM efforts that links specifically to the corporate purpose, aligns the leadership team and inspires the workforce.

Designing the right reporting and employee and stakeholder engagement — and linking HCM to a company’s mission — will help an organization encourage desired behaviors and mobilize individual and organizational efforts toward achieving its goals. The actions of employees — those along the supply chain and stakeholders — directly reflect their experiences with the organization’s ideals and priorities. When employees clearly understand what’s behind a request or an effort, that positively affects both what they do and how they do it, which ultimately will affect the perception and engagement of all stakeholders.

2. Engage the right leaders

Most companies have a sustainability group or an individual sustainability officer who issues an annual corporate responsibility report. But this team or officer may not be integrated with HCM decision-makers, a company’s strategy development and controls, asset allocation, risk assessment, financial reporting, and investor relations teams. HCM information may therefore not be embedded, or even considered, in the overall enterprise risk-management process. With the push from investors and the SEC for both quantitative and qualitative disclosures in corporate filings, it is becoming increasingly important for financial reporting decision-makers, as well as internal audit, to be engaged.

The financial reporting group can be a trusted adviser, given its familiarity with processes and controls associated with Sarbanes-Oxley (SOX) compliance, and can leverage knowledge of those mature processes to support the HCM data. This is important because without proper process and controls, the company's position will not have credibility and confidence in the marketplace. Additionally, this group can help model the governance of this data, as it has an appreciation for pain points it may have encountered that will be helpful to an organization starting on this journey.

The metrics are just one part of the reporting. The chief human resources officer and chief diversity officer are critical to telling the story and developing the strategy for a more diverse and inclusive workplace. A disclosure without information on where your company has been, where it is now and where it aspires to be will not accomplish the objective of greater transparency: It’s important to hold your leaders accountable for progress on your commitments to greater diversity, equity and inclusivity, both within your four walls and externally.

3. Choose standards, metrics and data collection processes

The right data can help companies do everything from optimizing business processes to understanding the workforce on a deeper level — and it’s essential to effective HCM efforts.

HCM reporting is largely being driven by the reaction from internal and external stakeholders. And while disclosure had been optional, in 2020, the SEC amended its disclosure requirements relating to the description of the business, legal proceedings and risk factors. The final rules require registrants to describe certain aspects of their human capital resources within the overall framework of principles-based disclosures. Any human capital disclosures should be supported by effective controls and procedures, showing that the movement toward a data-driven approach has started — and will continue to evolve in preparation of expected disclosure updates.

Companies face a few key challenges when it comes to measuring, reporting and gaining deeper insights from data. For instance, in terms of ESG reporting, there is often no consensus on what metrics to report. Companies also frequently lack a standardized reporting process, controls and quality data, and reporting is mostly manual.

To counter such hurdles, leaders should define a set of relevant ESG metrics and proactively determine what information to report, how to source it and who the key stakeholders are. They should likewise standardize data sources and attributes, data quality expectations, definitions of metrics, and general policies and procedures related to gathering data. And they should make use of existing financial reporting processes and tools — using these and other methods to automate reporting and analysis — and upskill employees to derive and communicate insights from the data.

Getting started on human capital management

Companies are at different stages of their journeys to build a human capital reporting strategy. However, regardless of the stage, your company can prepare for the SEC’s proposed rules. Company leaders may begin the process for investor-grade human capital reporting by leading discussions on:  

  • Discovering what’s possible: Assess where the organization aspires to be and what’s standing in the way of getting there, as well as where the data currently exists across the organization. Answer the question, “Where are we today?”
  • Aligning values and purpose and developing a strategy/roadmap: Knowing why you’re doing what you’re doing (your mission), where you’re trying to go (your vision), and how you’re going to go about it (your values) is the glue that holds an organization together. The critical first step aligns the various groups in advance of developing your strategy/road map. Once you have the right stakeholders at the table, think big and be aspirational about what you want to achieve.
  • Realizing a return on inclusion: Success is achieved when there is engagement with HCM issues at every level of the organization. Road maps must begin to shift mindsets from viewing HCM as an HR or business issue to considering it as a leadership issue that affects the bottom line and shareholder value.

Through this exercise, companies can show both progress and accountability. They can also use their data-driven insights to gain a clear understanding and path forward for delivering stronger HCM outcomes for both today and tomorrow.

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Gena Sullivan

Gena Sullivan

Partner, PwC US

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