In August, the SEC dipped a toe into the burgeoning field of environmental, social, and governance (ESG) disclosure by amending Regulation S-K to include an enhanced disclosure topic on human capital resources. Under this new item, public companies must provide, to the extent material to an understanding of their business, a description of the company’s human capital resources, including “any human capital measures or objectives that the registrant focuses on in managing the business.” The requirement is principles-based, rather than prescriptive; that is, aside from requiring disclosure of employee headcount, it does not mandate specific information; instead, a company’s disclosures must be “tailored to its unique business, workforce, and facts and circumstances.” See SEC, Modernization of Regulation S-K Items 101, 103, and 105 (August 26, 2020).
While the SEC did not prescribe any particular disclosure approach, it recognized that there are existing, voluntary frameworks that can facilitate disclosure pursuant to the new human capital requirement. The Sustainability Accounting Standards Board (SASB) has followed up on this comment by issuing SASB Human Capital Bulletin, which provides an overview of the human capital-related topics in the SASB’s standards to assist companies in preparing their disclosures. The Bulletin is both a primer on the SASB standards generally and a tool for companies that are formulating their response to the new Regulation S-K human capital requirement.
The SASB Standards
SASB’s standards are intended to facilitate communication between companies and investors about financially material, decision useful, ESG information. SASB recognizes that material ESG topics vary from industry to industry. Accordingly, its standards are industry-specific, based on a classification system that recognizes 77 industries in eleven industry sectors.
SASB organizes the universe of ESG risks and opportunities that companies may face under five broad sustainability dimensions – Environment, Social Capital, Human Capital, Business Model & Innovation, and Leadership & Governance. Each of these five ESG dimensions incorporates various general issues categories (GICs), cross-cutting themes related to one of the sustainability dimensions. In total, there are 26 GICs. For each industry, SASB has identified a set of disclosure topics, which are industry-tailored versions of those GICs that are reasonably likely to have financially material impacts on companies in that industry. SASB has developed metrics for each industry disclosure topic. Metrics are quantitative or qualitative measures that are intended to provide a basis for gauging performance on the associated disclosure topic. Metrics are accompanied by technical protocols that explain how the metric should be applied in creating a disclosure.
Human Capital in the SASB Standards
As noted, Human Capital is one of the five SASB ESG dimensions. There are three GICs related to Human Capital -- Employee Health & Safety; Employee Engagement, Diversity, And Inclusion; and Labor Practices. For the majority of SASB’s 77 industries, there are one or more disclosure topics with associated metrics relating to the Human Capital GICs. The chart below, which is taken from the Bulletin, illustrates how this framework applies to a specific industry – Road Transportation.
Copyright ©2020 The SASB Foundation.
As the chart indicates, Road Transportation is one of the industries in the Transportation sector. Employee Health & Safety is one of the GICs within the Human Capital sustainability dimension. SASB has determined that, for companies engaged in Road Transportation, the disclosure topic Driver Working Conditions is an aspect of Employee Health & Safety that is likely to be financially material. One of the metrics that SASB has promulgated to measure performance on this disclosure topic is the total recordable incident rate and the fatality rate for direct employees and for contract employees. The technical protocol for the metric explains how these rates should be determined and presented.
Using the SASB Standards to Develop Human Capital Disclosures
The Bulletin suggests that companies follow a two-step process in using the SASB standards to identify human capital-related topics and metrics for use in disclosures under the new SEC requirement.
The first step is to review the SASB human capital standards applicable to the industry or industries in which the company operates. For 48 of the 77 industries in SASB’s classification system, SASB has identified one or more potentially material human capital-related disclosure topics and related performance metrics. The Bulletin lists these industries, and companies should refer to their applicable industry standard in developing their disclosures. (Presumably, this could entail including disclosure of the SASB human capital metrics for the company’s industry in SEC filings, and could also, or alternatively, entail a company narrative discussion of the human capital disclosure topics SASB has identified for the industry.)
The second step is to review the human capital topics and metrics in industries that are similar to the industry or industries in which the company operates. As noted, for some industries, SASB does not currently have human capital-related disclosure standards. Moreover, companies in industries that have SASB standards may want to consider whether additional human capital-related disclosures beyond those in their industry standard would be material for the company. In this regard, the Bulletin recommends that companies review the disclosure topics and metrics for other industries under all three of the Human Capital GICs -- Labor Practices; Employee Health & Safety; and Employee Engagement, Diversity & Inclusion -- and also for Supply Chain Management. Supply Chain Management is one of the GICs under SASB’s Business Model & Innovation ESG dimension. The Bulletin summarizes the scope and potential relevance of these GICs:
Labor Practices. SASB disclosure topics associated with Labor Practices encompass issues such as pay structure, relations with organized labor, and policies in place to protect workforces.
Employee Health & Safety. SASB disclosure topics associated with Employee Health & Safety address a company’s ability to create and maintain a safe and healthy workplace environment. These topics may encompass mental health in addition to physical wellbeing and incorporate training and culture.
Employee Engagement, Diversity, & Inclusion. SASB disclosure topics associated with Employee Engagement, Diversity & Inclusion address 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.
Supply Chain Management. SASB disclosure topics associated with Supply Chain Management incorporate externalities created by suppliers through their operational activities, such as environmental responsibility, human rights, labor practices, and ethics and corruption.
For each of these four GICs, the Bulletin includes examples of metrics found in the SASB standards. Companies may want to consider whether any of these metrics suggest disclosures that would be material to an understanding of their human resources management.
SASB Human Capital Management Research Project
The Bulletin also points out that SASB’s human capital standards are a work in progress. SASB has undertaken a research project to assess the topic of human capital management with the objective of designing a framework to support the identification of financially material impacts related to human capital management. This framework may result in modifications to the existing SASB standards to incorporate new elements associated with human capital.
The research project has identified several core themes:
Workforce Culture. “This broad concept embodies the values, processes, and outcomes of an organization and can drive its ability to produce a more productive, fair, and respectful work environment and therefore its ability to acquire, develop, and retain talent.”
Workforce Investment (including career and wealth-building opportunities). “The role of business in providing employees with career-building and wealth-building opportunities is becoming increasingly critical, and is associated with increased worker engagement and retention. It may also be associated with an ability to reskill or upskill workers to address labor shortages in some industries, and/or improve employee performance and productivity within others.”
Mental Health & Health-Related Benefits. “These issues include the increasing prevalence of stress, depression, and anxiety. In addition to mental health, the role of health benefits for workers, including benefits such as paid sick leave, may be associated with factors like job turnover, recruitment and retention, productivity, and lower rates of absenteeism.”
Alternative Workforce (contingent and contract labor). “This trend relates to the growing size of this worker classification and the expansion of the use of alternative workforces by a range of businesses.”
Although the project’s findings are preliminary and subject to revision, companies might also want to consider whether any of these themes are potential material to their human capital management and warrant disclosure.
Comment: In connection with their disclosure oversight responsibilities, audit committees will be considering their company’s human capital disclosures pursuant to the SEC’s new requirement. In addition, ESG disclosure is becoming increasingly important to investors and it is likely that additional disclosures in this area will become mandatory in the future. Audit committees may want to review the SASB Bulletin, both as a source of guidance on human capital disclosures and as a way of becoming more familiar with SASB’s standards and how they can support disclosure of material ESG information to investors. A growing number of companies are voluntarily making SASB disclosures, and the Bulletin provides a good introduction to SASB for those who are not already familiar with its framework.