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Sustainalytics’ ESG Risk Ratings issue – Human Capital – focuses on the management of human resources. It includes the management of risks related to scarcity of skilled labour through retention and recruitment programmes and includes career development measures such as training programmes. Additionally, it includes labour relations issues, such as the management of freedom of association and non-discrimination, as well as working hours and minimum wages.

Human Capital in the Spotlight

Human capital is one of the critical value-driving intangible assets for companies. While having a strong workforce can support strategic growth, an inability to manage and incentivize employees may lead to demotivation, productivity decline and erosion of value. In his 2011 paper titled ‘Does the Stock Market Fully Value Intangibles?’ , Wharton’s Alex Edmans noted that employee satisfaction is positively correlated with shareholder returns.

 

Examining the Unmanaged Risks for Human Capital by Industry

Sustainalytics’ ESG Risk Rating on a company’s human capital includes the risk that the company is not actively managing with relevant policies, programmes and systems in place. Based on our ESG Risk Ratings framework, we see that human capital is a material issue for 39 out of 42 industry groups and covers more than 4,600 companies in our comprehensive universe. Referring to Exhibit 1, the Software & Services industry has the highest unmanaged risk score, followed by Energy Services, Machinery and Semiconductors.

Unmanaged Risk by Industry

Exhibit 1: Unmanaged Risk by Industry (Source: Sustainalytics, Data as of October 2021)

1“Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”

2“Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices”

 

As digitization and technology evolve at a fast pace for many industries, to stay competitive and create value for stakeholders through sustainable long-term strategies, companies should have flexible business models. Such requirements are highly dependent on companies’ human capital. Applying Sustainalytics’ ESG Risk Ratings, investors can see which companies are most exposed to this key issue and how well they are managing their related risks.