SEC's New Human Capital Disclosure Requirements: What You Need to Know and Do Now
On August 26th 2020 the U.S. Securities and Exchange Commission (SEC) announced that it adopted new Human Capital Disclosure Requirements for public companies reporting / listing on the U.S. exchanges, opening a new era of human capital reporting and disclosure.
Here is a quick FAQ to help companies like yours better understand what it means for them.
Q1 - What does this mean for my company now?
Public companies are now required to describe in more detail how human capital impacts their business results, including human capital risk factors that have or in the future could be expected to have a negative impact on the company. Prior to this adoption, the SEC only required companies to disclose the number of its employees.
With the SEC ruling companies now will need to determine:
Which metrics to disclose to accurately reflect the business impact of their human capital investments and management practices,
How to pull together data from myriad systems to calculate those metrics, and
How Investor Relations communicates the link between the metrics results and business strategy.
Keep in mind that the rules become effective 30 days after publication in the Federal Register, currently anticipated to be published in September 2020.
Q2 – How can we comply with the new disclosures?
The SEC did not specify an exact set of measurements or objectives. Instead it let companies decide what is best for them based on the nature of their business. This creates both confusion and opportunities.
One option for companies is to leapfrog a minimum response to SEC requirements by adopting the recently released ISO 30414:2018 human capital reporting and disclosure guidelines. The ISO 30414:2018 guidelines provide a set of recommended human capital metrics and show how to calculate them. Many may view it as a “safe harbor” type approach for meeting the new SEC human capital disclosure requirements.
Q3 - What should we do now to prepare?
As noted above companies will need to determine which metrics to disclose, how to pull together data from myriad systems, and how to communicate the link between the metrics results and business strategy.
To determine the best compliance approach for your company and help prepare for disclosure, we recommend a 5-step Rapid Readiness Assessment to examine the gap between current disclosures versus the SEC’s new rule amendment and to determine how to fill any gaps. These steps would include:
Assess current Human Capital risk disclosures vs. the new SEC human capital disclosure requirements
Identify potential disclosure gaps
Adopt ISO 30414:2018 reporting standards or select alternative metrics
Evaluate enterprise data availability and system reporting capabilities
Link Human Capital disclosures to business strategy and results
Some companies will find themselves further ahead than others. For example, many leading global companies already disclose extensive human capital information as part of their Environment, Social and Governance (ESG) reporting. Samsung, Deutsche Bank and Allianz report on human capital separately or as part of their annual sustainability reports.
Other companies may already have adopted workforce analytics across the enterprise and have the systems in place to integrate data, calculate standardized metrics, and identify the key drivers of changing trend rates or performance vs. industry benchmarks. Most U.S. companies, however, are in the early stages of human capital measurement and will find themselves with a significant amount catch-up to do.
Q4 – What does the long-term future look like for Human Capital Disclosure?
For many years, institutional investors have been asking for more information on how companies are managing their human resources. COVID-19 also has pushed companies get a better understanding of all aspects of their workforce as has an increased focus related to diversity and inclusion in the US.
This amendment is part of SEC’s larger effort to modernize public company disclosure and begin to include more ESG elements. Also, the number of ESG funds and demand for ESG investing has been rising consistently in recent years. In 2018, the amount of ESG-mandated assets was at US $12 trillion, which is expected to grow at a 16 percent Compound Annual Growth Rate (CAGR) to a total of US $35 trillion by 2025.
With human capital being a part of the “S” element of ESG, companies can expect investors to be looking for them to be taking a more active role in providing enhanced measurement in the ESG area.
