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Aug 18, 2022

‘Effective management of human capital increasingly critical to company success,’ says NBIM

World’s biggest sovereign wealth fund publishes new expectation document for the more than 9,000 companies in which it is invested globally

‘Companies that invest in their workers and effectively harness the value of their human capital are more likely to be successful over the long term,’ says Norges Bank Investment Management (NBIM) as it launches a new paper setting out its expectations around human capital. ‘Human capital management (HCM) will be a priority in our ownership work going forward.’

NBIM, which manages Norway’s $1.2 tn Government Pension Fund Global, yesterday revealed record first-half losses as its return on investment in equities hit -17 percent. The fund owns on average 1.3 percent of all the world’s listed companies, with stakes in 9,338 companies at the time of writing.

Now, NBIM has published an expectation document setting out what it wants to see from these firms on the increasingly important issue of HCM – something it views as having the potential to enhance or hamper value.

Noting the fast pace of change around human capital issues, the fund manager said: ‘New technologies, including artificial intelligence and automation and related alternative workforce models, such as hybrid working arrangements, seasonal and temporary workforces and the gig economy, present new opportunities and risks for companies.

‘At the same time, shifting societal pressures, growing wealth and income inequality and new platforms that both amplify worker voices and allow a window into company culture and practices, are placing companies’ management of human capital under greater scrutiny. Roles and responsibilities of businesses with regard not only to direct employees, but also to those in their supply chains, are further evolving. In this context, proactive and nuanced HCM, as well as strengthened oversight and reporting, is increasingly relevant.’

Because human capital covers such a wide array of themes that companies will address in various ways, NBIM stresses that as an investor, it is seeking to understand companies’ different approaches to HCM, rather than taking a one-size-fits-all approach.

Taking about how many of these issues essentially offer a ‘social license to operate’ as well as ‘broader market legitimacy,’ NBIM says it recognizes that strategies and priorities for managing the many issues covered by the human capital umbrella are likely to reflect specific company circumstances.

However, the fund manager also points to the risks companies open themselves up to if they do not invest in human capital.

‘Failing to develop appropriate HCM strategies can bring material financial, legal and reputational risks for businesses,’ it says.

The reporting challenge

As an example of the wider benefits that a focus on many human capital issues can bring, NBIM says ‘the argument in favor of innovative and robust policies to promote diversity, equity and inclusion transcends the direct company-level financial or risk-mitigation benefit such policies might bring.

‘We believe that all market participants will benefit from the strengthened legitimacy of a diverse, equitable and inclusive economy. Similarly, we believe companies’ investments in developing both their own workers and those in the supply chain are likely to have spill-over impacts on the economy. Such investments will indirectly support broader economic growth and potentially lower the cost of labor displacement and retraining associated with the transition to a low-carbon economy and other societal shifts,’ says the fund manager.

It also says companies are ‘failing’ to provide investors with a clear picture of their investments in human capital through their corporate reporting, though NBIM notes the continuing ‘evolution’ in this area ‘given the breadth of issues and metrics that may relate to a company’s investments in human capital and the diverse approaches that may appropriately be taken.’

The fund manager sets out its expectations across four themes, stating that companies should:

  • Integrate HCM into policies and strategy
  • Integrate material HCM risks into risk management
  • Disclose material information related to HCM
  • Engage responsibly and transparently.

Garnet Roach

An award-winning journalist, Garnet Roach joined IR Magazine in October 2012, working on both the editorial and research sides of the publication. Prior to entering the world of investor relations, her freelance career covered a broad range of...