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The H in ESG

As Panvestors, when analyzing companies we have always distinguished social capital - the S in ESG which we define as the stakeholders external to an organization, from human capital - the people/employees who make a company dynamic, profitable, impactful and great. Human capital management is not new to corporates but as we will share today, it is emerging as one of the most important risks and opportunities within a corporate’s future. Alongside climate action, human capital discussions are top of the list in any stakeholder discussion that corporates have. Today, my colleague Esther will share how we as Panvestors consider human capital at Panarchy Partners.

What does Human capital mean to us, and why do we incorporate it in our investment process? As a Purpose-driven investor, we believe that companies that improve and sustain progress on all forms of capital whilst incorporating them into their business models can ensure long-term sustainable financial returns and positive impact on their ecosystem and the world. A company’s human capital is one of four critical forms of capital that encompasses the collective measure of knowledge, education, skills, competencies, and other attributes that are invested and engaged in corporate operations to produce goods, services, or ideas in market settings. [1] Human capital as we see it is distinct from the traditional human resources, with the former maximizing the value that a person brings to an organization (via training, culture, innovation etc.) as opposed to the latter which may still be focused on handling immediate operational aspects and other employee-related affairs (recruitment, payroll, benefits administration, enforcement of company policies etc.). And so, we take a longer-term view and see human capital issues not merely as undesirable expense items but deem them potentially value accretive, especially if integrated well as part of a company’s long-term sustainable growth strategy. Allow us to share our thoughts on why and how we are focusing on Human Capital. There are both challenges and opportunities of human capital in which we seek to understand and confront. Opportunities include the financial causation of human capital, where studies by academia [2], and industry experts [3], have found that managing and investing in human capital can unlock greater company performance. Beyond good morals, human capital management creates value with the ultimate outcome as increased productivity, efficiency and therefore being able to create greater profitability. With that said, several challenges persist. The extent of direct correlation and contribution to companies’ financial performance varies across sub-themes of human capital and is sometimes under-explored either qualitatively or quantitatively, as certain sub-themes are still in a more nascent stage of measurement and standardization. Comparison of human capital metrics is also not as straightforward as comparing financial metrics. There are a few reasons for this:

  1. Contextual circumstances of human capital may be industry or region specific, hence there is no one size fits all approach. An example of this can be found in the apparel industry where there is a disproportionate number of female workers in factories compared to males. Nearly 60% of workers globally are women, reaching nearly 80% in some regions.[4] Whereas in building and construction, it has contrastingly been male dominated. In the UK for instance, just 15% of the construction workforce are females due in part to the outdated perspectives on equality and bias. [5] It also has an average gender pay gap of 23.8% which surpasses the overall UK average. [6] These differing circumstances have clear implications for organizations seeking to implement, measure and compare the outcomes of human capital efforts across industries and regions.

  2. Human capital data is still fairly guarded by human resource departments in fear of losing a competitive advantage or due to the lack of suitable metrics. For instance, the productivity of a workforce can be measured using accounting metrics such as human capital ROI and data sources such as compensation, benefits and training that most companies would already be collecting internally. However, public disclosure of these data sources remains limited and/or inconsistent.

  3. Not every aspect of human capital currently has a benchmark for what is “ideal”. While there might be industry benchmarks for worker health and safety and wages as examples, there is none so far for employee wellness/satisfaction or corporate culture despite its growing imperative. These challenges demonstrate the complexities of measuring and comparing companies’ impact on human capital in a universal manner, thus limiting investors’ ability to fully understand how well managed a company’s greatest assets are.

Nonetheless, there is a greater push for companies to report and disclose on human capital in response to increased regulatory requirements and we believe that investors like us have growing reasons to understand and monitor portfolio companies’ human capital performance. For instance, the SEC’s Form 10-K filings require companies to describe their human capital resources, including any human capital measures or objectives they focus on in managing the business, to the extent material to an understanding of the company’s business as a whole. [7] The EU’s Corporate Sustainability Reporting Directive (CSRD) requires mandatory annual reporting of over 30 people metrics. [8] More are likely to come such as the UK’s Sustainable Disclosure Standards (UK SDS). [9] Both structural and cyclical reasons reinforce the materiality of human capital and the need to examine companies’ preparedness for challenges and opportunities surrounding the future of work. For instance, the COVID pandemic, the great resignation and other labor market trends continue to impact the global workforce. These occurrences often reveal companies’ ability to withstand such cyclical dynamics, resulting changes, and capacity to build resilience going forward. What is our approach to human capital from a resilience perspective? Since our early days, several aspects of human capital have been incorporated into our proprietary Resilience Framework, which is the fundamental sustainability analysis tool deployed at Panarchy Partners. Using publicly available data disclosed by companies and via engagement, our analysis is regularly updated, thus allowing us to track a company’s progress on human capital over time. Engagement is a critical pillar of our process as it helps us better understand how companies are maximizing human capital and hopefully this will lead us to the magic formula of financial causation. Given the current limitations on the availability and inconsistent nature of publicly available data, we focus our attention on the extent that a company considers and is committed to its human capital. To illustrate this, we look at Trane Technologies as the company goes beyond a basic level of ingraining human capital considerations into its business operations. We first look for stakeholder engagement and resulting material issues that are specific to the company, and it informs us of the human capital focus areas that should be given attention. Trane Technologies’ 2022 materiality assessment shows that DEI and company culture are deemed as top strategic opportunities and also receives high stakeholder attention. Other human capital topics identified are occupational health & safety, training & development, pay equity, and human rights. Secondly, to hold companies accountable to the material issue identification, we also require them to set S.M.A.R.T [10] targets on the material human capital themes relevant to the company. In Trane’s example, the company has in place S.M.A.R.T targets to increase gender, racial and ethnic representation at various levels of the organization and to maintain a culture of safety through world-class safety metrics by 2030. We monitor progress against these S.M.A.R.T targets on an annual basis. In addition, we also reward companies with DEI policies, initiatives and disclosure of workforce data, and when a company has a whistle blowing policy and mechanism available to its employees (as an indicator of an organization’s openness to feedback). There are several policies, practices and initiatives in place which are helping Trane reach its objectives. The Board of Directors oversees the company’s DEI strategy alongside the Human Resources and Compensation Committee to review DEI and other human capital matters. On top of that, Trane has an Internal Diversity Council comprising cross-functional global leaders that work together to ensure DEI goals are integrated with core business practices. Annual incentive plans for senior leaders include DEI targets which holds them accountable and further sends a strong signal of the significance of its human capital aspirations. Two-way communication is vital for fostering community and belonging, and this is made possible through discussion platforms such as its Employee Resource Groups, Inclusion Networks and Bridging Connection series. As for diversity in talent management, Trane focuses on a skill-based approach for recruitment and partners universities, key industry and professional organizations to diversify its candidate pipeline. The outcome of these efforts are seen in consistently high annual employee engagement scores and incremental improvements towards 2030. Our engagement approach is multi-faceted, often with the objective of understanding the context behind targets, clarification on progress or opportunities and challenges that companies face. Having had multiple engagements with Trane over the years, we have put a spotlight on several topics such as relief and support for its employees during the peak of COVID in 2020/2021. Some notable initiatives included the expansion of its employee relief fund to support employees impacted by health or financial hardship resulting from the pandemic, and amended US medical plans for employees. Trane has also been rolling out wellness programs for all teams, although localization is a big challenge. In 2022 amid social movements in various regions, we aimed to understand more about the company’s DEI efforts, specifically if it was approaching it with a “Glocal” perspective. [11] And considering the current inflation crisis, we asked for the company’s views on living wages. [12] Trane shared that it does not formally use this term in its reporting, however its current compensation and benefits practices for employees globally meet or surpasses the standard of a living wage. Conclusion As Purpose-driven investors, having analyzed and engaged with our portfolio companies and candidates over the last few years, we are convinced there is a win-win when the workforce is compensated fairly and adequately trained amid the promotion of innovation, incentivization and inclusion. Through ongoing research, our team continues to track the evolution of human capital trends and impending regulations. As companies are now more inclined to raise their level of transparency, we aim to have more disclosures from our portfolio companies on themes such as fair wages, company culture and inclusion, productivity, engagement, mental health, and turnover. Given the complexity of human relationships and behavior, we seek to uncover drivers and barriers of change and growth. Our understanding of human capital’s financial causation will continue to develop as long as it remains a priority on the agenda of investors and companies, and as nuances are better understood over time. What we deem fundamental to enable increased sustainable returns is to take stock of portfolio companies’ performance via the right metrics, to gain further insights by way of engagement, and to then hold companies accountable for their human capital ambitions that aim to generate strategic long-term value. Happy Panvesting, Esther Wee [1],with%20the%20firm%20growth%20rate. [2] Examples of academic studies include:,, [3] Examples of studies by industry experts include: McKinsey, Investor Responsibility Research Center Institute, Schroders in collaboration with CaIPERS and the Saïd Business School at University of Oxford [4] [5] [6] [7] [8] [9] [10] S.M.A.R.T targets - Specific, Measurable, Achievable, Relevant, Time Bound [11],adaptation%20within%20those%20key%20areas. [12]


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