Institutional investors should narrow in on the importance of human capital as an environmental, social and governance issue.

“We know that ESG is about trying to balance the real world with the numbers,” says Sudhir Roc-Sennett, head of ESG at Vontobel Asset Management’s Quality Growth Boutique.

So far, financial analysts have been relatively ill-equipped to measure a company’s worth based on the value of its employees, he says. While it’s simple to quantify the resources a company has at its disposal to achieve its business objectives, it’s the people working there that turn any of that into value. “There’s an absolute dearth of information on the people that turn that equipment and that opportunity into the savings and dividends and growth.”

Read: Should investors pay closer attention to the ‘S’ in ESG?

To analyze data around human capital, further transparency is required on how employees are actually doing, notes Roc-Sennett. Beyond how many people they employ, there’s little standardization in the data that companies present to investors so they can gain a clearer view of operations.

For example, the average age of employees would be a valuable data point, he says, as would understanding what type of degrees they have and what kind of turnover a company experiences. “Turnover’s a huge one.”

If a company experiences an average turnover of two per cent for a number of years and then that level skyrockets to 15 per cent, that data shows that something is clearly wrong, regardless of how the company might outwardly appear to be performing, says Roc-Sennett.

“Without reporting, you actually wouldn’t know unless you read about it in the press or management told you; it wouldn’t be a required disclosure. And this kind of thing is really important.”

Read: New U.K. Stewardship Code outlines best ways fiduciaries can integrate ESG

One way of breaking down the value of each individual employee is to subtract the worth of a company’s physical assets, as well as any value to its franchising rights and boil it down to how much market value is left when just looking at the people, he says, noting a major company could easily have each employee valued at multiple millions of dollars, so issues like whether they’re happy, qualified or motivated matter a lot.

The management overseeing the bulk of employees, then, can make or break a company, says Roc-Sennett. This zeroes in on the tangible importance of good governance. “The vision of the leader is very important. And then you’ve got to have a structure that keeps people feeling rewarded for their efforts.”

Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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