Sustainable Human Capital Management (HCM): Six Principles to Guide Your Journey

Until recently, most HR professionals have stayed on the sidelines of corporate sustainability and their firm's ESG (Environmental, Social and Governance) investment activity. But with increasing pressure from investors, employees, and other key stakeholders, HR executives are leaning in to the strategic opportunity of a sustainability lens and sustainable Human Capital Management (HCM) practices.?

For the past year, our Human Capital Investment and Reporting Council (HC IRC) has explored ways to bring sustainable business practices into people management. Summarizing our discussions and research, here's what we think it means to apply a sustainability lens to HCM and six principles you can use to guide your own journey.

What is Sustainable Human Capital Management?

Three basic concepts are core to understanding the lens of sustainable Human Capital Management.

First, corporate sustainability?refers to creating long-term value for stakeholders through balancing the three pillars of people, profit, and planet, often referred to as the Triple Bottom line (TBL). Once seen as a “nice to have” for corporate reputations, corporate sustainability practices are now considered by many investors as essential to future growth and innovation, access to capital, and even corporate survival.1/

Second, sustainability is about systems thinking and problem-solving.2/ Accustomed to working in HR silos, systems thinking is a relatively new concept for HR. It begins with identifying a problem – such as productivity or unwanted turnover - and uses analytics to identify the relationships of the parts (recruiting, hiring, onboarding, coaching, performance management, etc.) affecting that problem. Sophisticated analytics examines human factors driving profitability, revenue growth, customer satisfaction, HC ROI (Human Capital Return on Investment), stock price, and more.

A third key sustainability concept is equity. The 2015 United Nations’ seventeen Sustainable Development Goals (SDG’s) was a milestone designed to be a "blueprint to achieve a better and more sustainable future for all by 2030.” The SDG’s are the “world’s shared plan to end extreme poverty, reduce inequity, and protect the planet.” And while these goals may still be far off, conversations around diversity, equity and inclusion, along with human rights, have become a key part of the business sustainability conversation. 3/

Sustainable Human Capital Management brings these ideas together as a strategic process for managing the risks and opportunities of workforce investment and long-term value creation through people. It puts the workforce (including non-employees) at the very center of how value is created by and for stakeholders.

Why Sustainable HCM Now?

Today, 90%?of S&P 500 market value is tied up in “intangibles” – assets generated by people such as brand value, goodwill, intellectual property, R&D, and other innovation. So business value is largely the value of an organization's people.

The pandemic forced many companies to examine how and where this people value might be at risk. It put a spotlight on how companies managed safety, health, well-being, and employee experience, as well as issues of diversity, equity, and inclusion, and the critical importance of front-line workers. It forced some - though not all - companies to recognize the need to do more than manage labor as a cost, but to think longer term about the value of investing in people for the long-term.

Separately, even before the pandemic accelerated digital and workforce strategies, senior executives expressed concern about gaps in critical technical skills and changing demographics, trends considered a threat to strategy execution.

At the same time, concerns over climate change and the rapid rise of ESG (Environmental, Social, Governance) investing gave rise to a number of standard setting initiatives from SASB, GRI, WEF, and ISO, to name a few. In the U.S. the SEC announced “principles based” human capital disclosure requirements based on materiality of human capital to the business, opening the door for broad interpretation. (See our recent HC IRC report on HC Disclosure.)

To date, “few organizations have revealed much in response to the SEC’s ruling with the exception of some diversity, health and safety data,” states Jeff Higgins, HC IRC co-chair and an expert engaged in ISO human capital standard setting (ISO 30414). “But investors want more information. We now face a more direct mandate for human capital information and disclosure from elected bodies at the state and federal level.”

Where does this lead the HR professional? Many on our Council believe it provides a unique opportunity to engage in more strategic conversations and activity to enhance the value of and investment in people in their organizations. Based on our discussions and research, we’ve identified six principles to guide any organization on its journey to more sustainable human capital management.?

1. Clarify and communicate clear business purpose and a focus on stakeholders needs, especially employees.

Clear purpose is the key to unlocking the value of what people contribute to the business, along with developing the trust of consumers, investors, and other stakeholders.

“Purpose is not merely a tagline or marketing campaign: It is the company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them,” writes BlackRock CEO Larry?Fink. 5/

Purpose is about working purposefully daily with a clear sense of what creates value for the business. Studies by McKinsey link corporate purpose to higher levels of engagement and resiliency, along with broader positive work and life outcomes. 6/

Practice in Action: Verisk

Verisk is a leading data analytics provider helping customers protect people, property, and financial assets worldwide.?Recognized as a Great Place to Work and on the Wall Street Journal’s 100 most sustainably managed companies list, Verisk’s 9300 employees operate worldwide in 34 countries. A consistent market performer and innovator both before and during the pandemic, Verisk’s 2020 Corporate Social Responsibility Report, Moving Forward, emphasizes its “North Star” of Sustainability and corporate purpose.?

“The building blocks of sustainability—represented by its environmental, social, and governance components—serve as fixed points to assess, position and set course for a journey aimed at maximizing shareholder value over the long term by embracing the needs of stakeholders most likely to affect—or be affected by—the actions of the company,” states CEO Scott G. Stephenson in the report.

A top people analytics professional who was recruited to work at the company, noted, “it’s just the way we do things around here. Sustainability is core to our purpose and brand. It’s part of the reason why I took this job.”

#2. Measure the people metrics that align to your business outcomes and top challenges.

HR departments and companies are full of data, but much of that data is not useful in building business outcomes. Aligning your human capital metrics to your business metrics and critical challenges can be a tall order, especially when it comes to how that human capital data is collected, validated, and shared across the organization.

The journey to better human capital metrics may start with prioritizing the business opportunity or problem, be it productivity, customer growth and retention, quality, or innovation. Then it pays to gain sponsorship and partnership around addressing the problem that sponsors, business leaders, employees, and customers most care about.

Practice in Action: Uber

As the largest mobility platform in the world, Uber has taken seriously its responsibility to aggressively tackle the challenge of climate change through measurement and accountability. The company set aggressive goals, transparency and accountability with its first Climate Assessment and Performance Report.

“Progress starts with taking a serious look at where we stand today and sharing results to drive accountability,” states Uber CEO Dara Khosrowshahi in the report.

“The current pandemic is clearly the most pressing crisis that demands a response from all corners of society. But climate change and the long-standing environmental consequences of transportation remain the ultimate long-term crisis that cannot be overlooked. At this unique moment, we have an unparalleled opportunity to build back better and greener, and Uber is committed to doing our part,” he states.

Driving accountability and building back better meant that sustainable productivity was a top concern. Head of People Analytics RJ Milnor recently shared a case study at People Analytics World– connecting the relationship of wellbeing, engagement, and sustainable productivity. Taking a systems approach, Milnor’s research showed that employee productivity increased during the pandemic, but at the expense of employee wellbeing, indicating long-term risks to the business.

“You want to optimize for engagement and wellbeing, along with productivity,” Milnor said. “To increase productivity, you need to manage engagement and wellbeing,” explained Milnor, who noted the critical role of employee engagement in achieving sustainability and other business objectives.

#3. Align with broader corporate social responsibility needs, including diversity, equity, and inclusion.

?In a year that changed everything, the pandemic exposed longstanding systemic health and social inequities and the toll such inequities had on vulnerable segments of the workforce, including front line workers.

?For many, the pandemic created a watershed moment for the S in ESG – highlighting issues of diversity, equity, inclusion (DEI), health, safety, and wellbeing, integrated with climate and environment concerns.??

?In 2020, DEI became fully part of the sustainability conversation, as a vulnerable workforce laid bare the need for change.?Boards and C suite teams focused directly on human capital issues, requiring updates on the heath, wellbeing, turnover, and productivity of their workforce. Board committees moved beyond executive compensation and succession planning to address larger workforce issues and committed to enhanced diversity in their own make-up.

?Practice in Action: Standard Bank

?Standard Bank Group is a financial institution that offers banking and financial services to individuals, businesses, institutions, and corporations in 20 African countries across the continent and abroad. It recently landed a spot on the Wall Street Journal’s 100 most sustainably managed companies list based on its sustainability disclosures, new educational endowments, and affordable housing investments.?

?The Bank produces a full suite of reports to cater to the diverse needs of its stakeholders. This includes a detailed Environmental, Social and Governance Report and an Integrated Report which “provides a holistic view of our ability to create sustainable shared value in the short, medium and long term.” Also included in the suite is a Reporting to Society which “aims to communicate with a broad group of stakeholders about our impacts on the societies, economies and environments in which we operate.”?

?“Standard Bank’s purpose is to drive Africa’s growth,” the report states. “We’ve identified seven areas in which we believe we can best achieve this purpose, while making a substantial positive impact on society, the economy and the environment, through our core business activities. The areas are financial inclusion; job creation and enterprise growth; infrastructure; Africa trade and investment; climate change and sustainable finance; education and health.”

?“It’s all about helping communities and customers to grow in Africa,” explains Head of Reporting and Analytics Ampie Swanepoel, who estimates that the human capital reporting is about 80% compliant with ISO 30414 human capital standards.?

#4. Build trust through transparency and disclosure in reporting using standard frameworks (SASB, GRI, ISO 30414, WEF, TCFD).

While ESG reporting has historically emphasized the environmental side of reporting and disclosure, two trends are important in future reporting, the integration of frameworks and the “S” and “G” in ESG reporting.

Among the many different reporting frameworks, SASB and GRI have attracted the most followers. These two agencies and several others have recently agreed to work toward an integrated reporting system. 8/ Human capital experts in the U.S. have focused attention on influencing a recent SASB human capital standards project due this summer.?9/

Practice in Action: Xerox

Xerox, who rank in the top twenty in the Wall Street Journal’s most sustainably managed companies list, used frameworks from SASB, GRI, and TSFD, along with the UN’s Sustainable Development Goals in its corporate social responsibility report.?Among its sustainability initiatives, the firm built a leadership development program for its high potentials around sustainability projects. Building sustainability principles and mindsets into leadership development training can pave the way for innovation and future growth.

Practice in Action: Deutsche Bank

Deutsche Bank is one of the first major companies to use the ISO 30414 Human Capital Reporting Standard in its HR Report 2020. The ISO certified report is the most comprehensive means to provide stakeholders with transparent insights into people strategy and public disclosure of human capital metrics. It provides guidelines on 21?core HR areas such as organizational culture, recruitment and turnover, productivity, health and safety, and leadership.

“By fulfilling the ISO standards, we make our employees’ contribution to organizational performance transparent. In our dialog with external stakeholders, we want to underscore the value of organizational culture, recruitment, productivity, health and safety, and leadership as key drivers of our success,” states Michael Ilgner, Global Head of Human Resources in the report.

?“Key achievements and developments in 2020 have been outlined in the areas of employee engagement, benefits and wellbeing, diversity and inclusion, attracting talent, development of our workforce, and the performance-based remuneration.”

?“It’s all about how the organization is governing its human capital,” states Deutsche Bank’s Hilger Pothmann. And while the S (social) metrics are critical, “the real juice is in the G (governance),” he notes. Among the questions he raises addressed by human capital standards: How reliable is the organization compared to its peer group? How good of a corporate citizen is it? How predictable is its performance?” Better business results, he suggests, is about “how companies manage their G (Governance) story.” Pothmann worked with experts from 22 countries to develop the Human Capital Reporting?guidelines under the International Standardization Organization (ISO 30414).

#5. Engage stakeholders to provide governance and execution capability (enterprise engagement).

Engaged stakeholders are a critical element of any sustainability effort and may represent the true power of aligned corporate value creation through people. Effective sustainability reporting typically begins with a materiality assessment and mapping of the needs and interests of internal and external stakeholders. 8/

“Sustainable performance comes not just from having engaged customers or dedicated employees but from having all stakeholders engaged in a common definition of the brand and its values, mission, goals and value proposition to its various stakeholders,” explains Bruce Bolger in Enterprise Engagement for CEOs.

Enterprise Engagement is tied to the tenets of stakeholder capitalism and reflects “the implementation process of achieving goals by fostering the proactive involvement of each and every customer, distribution partner, employee, vendor, or community member whose actions can affect results,” explains Bolger.

Practice in Action: SAP

SAP is another firm recently admitted to the Wall Street Journal's 100 most sustainably managed companies list. Its transformation to sustainability has been a long journey, beginning well over a decade ago that “would be a major transformational initiative that would involve all employees across all levels of the organization, and across all lines of business.”9/

?Today, SAP provides a “foundation for holistic steering and sustainability reporting, as well as solutions that address the urgent need for climate action, transformation to a circular economy, and socially responsible value chains,” the company reports.10/?

SAP’s Integrated Report?for 2020 reflects its belief that corporations can measure their business success more holistically through practices that connect economic, social and environmental impacts.”?Its 2020 social performance indicators demonstrate an engaged and increasingly diverse workforce and high levels of public disclosure.

?“Sustainability is no longer optional,” notes a recent report, “but has become key to the long-term success of any business. It’s about defining new competitive advantages, lowering risks, building resilience to pricing regulations, gaining ground with investors, and being ahead of emerging consumer demands. As a result, we see sustainability becoming a central dimension of corporate decision making, just like cost or growth.”

6. Promote and measure a collaborative and team-based culture for sustainability.

Our HC IRC group long ago identified culture as one of the most critical areas of sustainable HCM. In her ground-breaking book of case studies, Building a Culture for Sustainability, author Jeana Wirtenberg explains that organizational culture is the “shared values, beliefs, and workstyles that is important to a specific organization” and that culture “influences acceptable behaviors and practices.”?Yet critically, she notes that “each company defines a culture for sustainability in its own way.”?

Wirtenberg presents eight critical cultural dimensions that are the underpinnings of a culture for sustainability: values; mindset; leadership; transformational change process; employee engagement; learning; diversity, inclusion and social justice; and intelligence.

“The challenge and the opportunity is how best to encourage and help every company and organization, regardless of where it is now to make the leap as rapidly as possible…where people, planet and profits all interconnect synergistically in a new green economy,” she explains.

Practice in Action: Your Journey

Many opportunities exist for HR departments to drive a more forceful and strategic presence in sustainable business, transformation, and culture change. Could a focus on sustainability?be the elusive ticket to the strategy table that HR has longed for? Could it be a powerful means to enhance employee engagement and a more meaningful experience of work?

?“If HR isn’t viewed as strategically central to the functioning of the organization, perhaps it can benefit from this COVID-forced reckoning to undertake a significant self-examination and critical restructuring effort,” explains Dr. Jim Westerman in “A Sustainable Plan to Rescue HR from Itself” in?the journal?Sustainability.

Westerman argues for the need to rebuild HR through a sustainability lens so that it is “fully engaged with the organization’s sustainability strategy, building an organization’s sustainability capabilities through its core functions of selecting, training, and motivating employees.”

Ready to rebuild with a sustainability lens and gain the strategic opportunity? The six principles will guide your journey. Creating clear purpose, strategic measurement alignment, social responsibility, transparency and disclosure, stakeholder engagement, and a culture for sustainability are a few of the guideposts to get moving.

Amy Armitage is co-chair of the HC IRC, a community whose mission is to research, share, and develop sustainable human capital management practices. The HC IRC meets monthly and conducts research projects on sustainable HCM. Download our recent report on The State of Human Capital Disclosure Mid 2021. For information on membership, our community research and resources, and our next meeting, contact [email protected].

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